Series A Readiness

Investors contemplate five categories of risk as they evaluate candidate investments.  Typically when they decide to “pass” they cite one or more of these as their justification, sometimes encouraging you to circle back when it’s been addressed.  

 

Risk

Description

Series A Readiness

Technology

Can you actually make the dog food?  Does the product development require an advance in sub-atomic physics?

Savvy professional investors will want to see at a minimum, a working prototype.  In its absence, they’ll take a meeting with you, profess their interest and then conclude “it’s too early” for them to invest.

Market

Is there a big enough market to grow a significant company?

Company can show with reasonable assumptions  and supporting data that there exists least a $1B market opportunity.

Product

Will the dogs eat the dog food?  Will users try the product / service?  Will they adopt it (keep using it after trying it)? 

Some customers—representative of the market sizing exercise above—have tried the product and adopted it into their daily routine and are willing to speak with investors about their experience.   Note, if only ECAD customers use your product, but your market sizing assumes ECAD, Software Development and Pharm/Chem, be prepared to revisit your market sizing or defer funding until you get more diverse customers.

Team

Can the company attract a talented, experienced executive team and will they play nicely in the sandbox together?

Ideally, the prospective Series A-ready company has a CEO plus VPs of Engineering and Marketing.  Practically, investors view part of their value add as including team building and would rather fill an empty slot than invest in one weakly filled.  That means two out of three will usually carry the day, so long as those two are credible and competent in those roles.

Finance

Will the company succeed in raising further rounds, if necessary?  Will the capital markets reward investors if the company reaches its target

As the “VC checkbooks locked” period at the start of the decade underscores, this one rests largely outside of entrepreneur control.  That said, the well-prepared company will show investors a five-year pro forma financial plan which includes:

  • monthly (at least for the first two years, then quarterly) P&L, balance sheet & cash flow with
  • a bottoms up projections of sales
  • hiring plans by specific job function
  • a summary of key assumptions, and
  • convenient adjustment of those assumptions so their effect on cash needs can be easily observed.

 

Bear in mind that even though they portray themselves as consummately rational players, investors—just like car buyers—can fall in love.  And if so, may overlook a deficiency in one or more of the above.  But more likely, they may have felt the burn of falling in love in the past and may therefore place the bar in one or more of these categories unrealistically high to avoid reliving that pain, even if it means missing some sweet investment opportunities.  So be prepared for that reality, and as a result, plenty of dating.

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