
Investor Funnels for Series As - runesoerensen
https://blog.ycombinator.com/investor-funnels-for-series-as/
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lmeyerov
Not super surprising if you pay attention to the Soft Bank effect. Recent
analyses of ~1,000-2,000 Series A say similar things:
[https://techcrunch.com/2019/04/25/a-quick-look-at-how-
fast-s...](https://techcrunch.com/2019/04/25/a-quick-look-at-how-fast-series-
a-and-seed-rounds-have-ballooned-in-recent-years-fueled-by-top-investors/)

Average Series A:

* $5.3M raised pre-A

* $33M average pre-money valuation

* $10-15M average raises

* 80% have revenue, with ~$1M revenue to ~talk, and ideally $2M

So Series B is the new Series A, Series A is the new Seed II, and Seed.. oh
whatever. Even more interesting when talking to investors who are unaware of
the new reality. Fun times for fellow CEOs out there :)

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rahimnathwani
"On average, the companies that raised As had 30 coffee meetings with
individual investors. 50% of these meetings led to pitches to individual
partners. About 30% of partner pitches led to full partnership pitches. On
average, 1 of every 5 partnership meetings produced a term sheet."

Based on the above, it seems the average number of term sheets received by a
company that successfully raised a Series A was 1.

This surprises me because (i) it's often suggested you need more than one term
sheet to have a decent negotiating position, and (ii) a YC-backed company
should be better placed than most to get multiple, so if they're not getting
them, then who is?

~~~
gumby
> This surprises me because (i) it's often suggested you need more than one
> term sheet to have a decent negotiating position, and (ii) a YC-backed
> company should be better placed than most to get multiple, so if they're not
> getting them, then who is?

It's pretty hard to get more than one because every deal is on its own
timeline (you didn't meet all the prospective investors on the same day, and
each has its own internal timeline modulated by people being around and
internal process). If you're really hot (and this is easier in later rounds
where your A investor(s) can whip up interest) perhaps you'll get lucky, but
most deals aren't, even really good ones. In fact being "hot" in your A round
might be a negative predictor (I don't know) just as most child prodigies
flame out. FWIW, most of my financing have been multi-TS deals and none of
them have been round A.

Also when someone issues a TS (see below) you can try to run around and use it
to speed someone else up. That's hard, because the person who gave it to you
will pressure you to sign immediately lest the deal explode.

However you do have useful negotiating strengths even when you have only one
TS. It's _hard_ to issue one: every firm is unique but often you have to get
all or most of your partners to agree; typically you only do one or two
companies a year and the firm as a whole few, so nobody wants to write a TS
and then not get the deal: they persuaded their partners that _this is the
one!_. So you can push back on egregious terms, and propose alternatives to
things you'd prefer were too different. If you push too much they can walk
away (and then the partner will tell their partners "wow, we dodged a bullet;
that CEO would have been an asshole to deal with". But don't let it get to
that point.

Another way that I've done for my last two projects was write the terms
ourselves and issue our own term sheet. You're already implicitly doing this
as you discuss what you're looking for before getting terms from an investor
so why not simply propose a deal up front? Later stages are practically that
way already as the earlier rounds will have constrained various things. This
works if your team already have track records of investors making money.

~~~
corry
"It's pretty hard to get more than one [term sheet] because every deal is on
its own timeline" \- yes, but that's a symptom of a loose/poor/disorganized
fundraise (IMO), not a hard and fast constraint.

To me, the _whole point_ of running a tight and structured Series A process is
that you have the various horses crossing the finish line at the same time so
that you have multiple interested parties capable of issuing term sheets
concurrently.

To do that, you need to operate essentially a cohort-based funnel. Which is my
understanding of YC's Series A program - it provides the structure, batch-
processing, and funnel clarity to help make this happen inorganically in case
it doesn't organically.

The other big advantage of batch-processing is obviously more efficient use of
time.

~~~
rlucas
In the very best of circumstances your approach would be optimal. And in
fairness at later rounds or M&A this is what you hire an I banker for — To
create an auction.

But the great majority of firms raising a Series A aren’t so obviously
“Fundable” that they can reliably gin up a parallel set of term sheets.
Consider that if it takes 30 VC outreaches to average one TS, what would it
take to average two within an overlapping two week window (realistically these
things expire)? A lot more than 60 I’d bet.

Another thing about this is that these aren’t bandits or oracles or black
boxes you’re doing some kind of algorithmic search on. Ideally each pitch you
do will give you feedback and practice to hone the pitch, market feedback on
the actual underlying business, and possibly even introductions to helpful
others (customers or rarely investors; VCs tend not to pass along deals they
rent investing in because of signaling effects but intros / sharing does
happen).

So a Series A raise is a path dependent process.

~~~
corry
Good points, but I'm curious if getting multiple TSs is only true in "the very
best of circumstances".

For instance - is 30 VC outreaches a stretch? Sounds like a day or two of
focused efforts - cold outreach, working your network, etc. Heck, a BDR at any
startup company is doing more than that outreaches PER DAY to clients - so is
it unrealistic to expect CEOs to do that for something that's existentially
important?

But even then, if 30 gets you 1 TS, why not optimize your effort to get to 60
or 90 instead? Surely it's not perfectly linear... but at least you know the
order of magnitude of effort, right? And that still doesn't seem totally crazy
to me.

BTW - I'm prepared to accept that "it's impossible"; perhaps I'm overly
optimistic based on my own experience. Our Series A fundraise resulted in 4
TSs at the same time, not because we were "hot" like Facebook or because I was
an amazing CEO/founder, but because I had experienced CEO/founder mentors
guiding me in how to execute the process to achieve that exact outcome.

So net is I'm just not sure this isn't a "thing is hard and few people do it,
therefore it's impossible" versus a "thing is hard, so you need to work
backwards and do XYZ very well". And XYZ is just not widely known or even
understood by those who do it, and is likely hard too.

Net of all of this is that this is why the YC Series A program is a great
idea. It can provide best-practices and guidance to achieve "impossible"
outcomes, and it is essentially systematizing a process that perhaps is more
art than science.

That all said, to counter my own points - while there is probably some
operational lift by running a perfect process, that effect is likely dwarfed
by how compelling the startup is at that time. Is it growing 300%+ YoY with a
huge vision? etc.

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contingencies
This is sort of embarrassing for YC, so it's admirable they're sharing their
surprise. Reads kind of like _Breaking: people actually doing something know
more about its practicalities than supposed subject matter experts._ Points
for honesty. I wonder if there's a VC model that could apply solutions to this
category of issues from other domains (eg. traditional German trade schools)
against the traditional founder/PE/VC structures to avoid such scenarios in
future?

Also, the entire tier of coffee meetings don't really happen in Asia, we tend
to do either meals or in-house presentations in my experience.

~~~
JumpCrisscross
> _This is sort of embarrassing for YC_

Why?

~~~
rtpg
Well they're shocked by the 30 number, despite having had investments in like
624 billion companies so far. You think they would have at least heard about
something to this effect from their relationships with YC companies?
Especially given the whole "YC is about the network"

How good is the network if it doesn't even give you the basic knowledge for a
thing you are extremely likely to have to go through (Series A), right after
YC itself?

~~~
JumpCrisscross
> _they 're shocked by the 30 number, despite having had investments in like
> 624 billion companies so far_

Handholding start-ups through their Series As isn't YC's core competence. If
one could schedule two and a half meetings a day, on average, individual
partner pitches could be had in 3 weeks. Give it 1 week for a partnership
meeting and 1 week for a term sheet and you're talking zero to term sheet
inside a month and a half. That's good. Unusually good.

YC's network serves to speed up the rate at which those 30 meetings get
scheduled. Not change the fundamental dynamics of company-investor fit.

In any case, we have no baseline. It may be the case that 3% of YC coffee
dates result in a term sheet while 0.3% of non-YC meetings do the same.

> _You think they would have at least heard about something to this effect
> from their relationships with YC companies?_

There is a lot of information buried in relationships that never surfaces
because nobody is incentivized to ask. No CEO worth her salt will start waxing
lyrical about all their failed coffee meetings when a term sheet on the table
needs to be closed. And after the capital is raised, there are more pertinent
questions for both sides.

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pyb
Despite all the rumours about a glut of capital, the stats indeed show that
raising VC is not easy.

But to put things in perspective, it is common, even for great people, to go
through job searches that are tougher than this. (despite all the rumours
about a tech talent shortage)

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idlewords
The idea of a conversion funnel for investment captures the real business
model in play here. This is a marketplace in which the products being sold are
business stories, and the audience is a very small group of wealthy consumers.
Since the stories don't have to be tested against the real world, they can be
perfectly tailored to the preferences of the buyers.

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iandanforth
Does YC also provide any tools or standard processes around due diligence? I
haven't been through enough rounds to know if there is any standardization
between investors or if there is the possibility of encouraging such.

~~~
JamesAdir
Would love to know about that too!

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rundmc
Has anyone created a commercially available CRM for this purpose?

~~~
contingencies
Someone started one in Australia recently, but wound up pivoting. I think % of
companies in fundraising state at any time is too tiny to present an easily
addressable target market.

~~~
nl
What was the Australian company?

~~~
contingencies
Just checked. Can't find it. It was a sort of 'try this beta' -> feedback ->
meh experience with someone who reached out via YCSUS2018. They definitely
pivoted.

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dustingetz
Series A is defined as the first equity round (no matter the size)? So what is
the funding mechanic of a "average sized" 5M seed round?

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chrisseaton
> On average, the companies that raised As had 30 coffee meetings with
> individual investors.

What does 'coffee meeting' specifically mean?

~~~
JumpCrisscross
> _What does 'coffee meeting' specifically mean?_

Meeting at a coffee shop. Informal, short and stuffed in between the
investor's scheduled work. Pitch deck may or may not come out.

One implication of a coffee meeting is there is a personal layer to the
relationship. (Someone made an introduction, or you know each other from prior
work. Website submissions don't tend to land coffee meetings.) It also signals
a recognition, on both sides, that early-stage investing tends to require
personal connections between founders and their investors.

