
Series A Fundraising Guide - gtzi
https://marathon.vc/blog/series-a-fundraising-guide
======
dustingetz
"(investors aim at an ownership percentage and are willing to pay what will
get them there)"

What is the reason for this?

~~~
martinshen
I believe investors aim at ownership percentages at Series A mainly for pro-
rata.

Lead Series A investors usually get pro-rata rights. Generally, the wisdom in
startup investment is to double down on your winners and you typically can
only do so if you have pro-rata rights. In other words, if the startup does
super well, that VC will likely invest 10x more in real dollar terms to upkeep
their pro-rata.

Take 2 pretend funds: CoolVC has a 20% target ownership and CheapVC has a 10%
target ownership. They do their pro rata every round.

Rocketship Corp. will have the following rounds (super simplified):

Series A @ $25M post-money

Series B @ $100M post-money (15% dilution)

Series C @ $600M post-money (10% dilution)

Series D @ $3B post-money (5% dilution)

Series E @ $5B post-money (5% dilution)

Exit @ $9B

CoolVC would have exited with $1.8B + spent $100M (profit $1.7B) CheapVC would
have exited with $900M + spent $50M (profit $850M)

In other words, for an additional $2.5M in the Series A, CoolVC bought an
option that would ultimately make $850M more in real dollars than CheapVC.

In the VC world where 1 needle in the haystack makes or breaks your fund, it's
an inexpensive option. At Series A, there should still be at least 50X
potential upside.

Why do most VC funds target 15-20% ownership? Probably that's probably the
most they should get to balance founder ownership through further dilutive
rounds. If you look at my above example, remember that founders will probably
own less than 36% of the company (they also will get diluted by employee
incentive plans).

~~~
gtzi
That's a fantastic explainer, thank you. In general, VC is by nature a game of
ownership.

------
graycat
The guide is simplistic and wildly overly optimistic -- a founder raising a
Series A could not expect such fast progress, e.g., weeks.

Much more realistic and prudent are the common advice and reports of reality
that fund raising is difficult and challenging, a full time job, with effort
so large it is a risk to the startup, contacting hundreds of VCs, straining to
get _warm introductions_ , taking dozens, maybe 100+, of in person meetings,
for just one check, much less several, and months of time.

The firm is asking way too much in time, effort, and expenses from the
founder, e.g., flying to meetings with VCs. A founder would need a significant
source of funds just to apply as described.

There is the _pitch deck_ with more advice that is challenging but obscure.
Bluntly, there are NO good guidelines, many guidelines that vary wildly and no
good guidelines, for what should be in a pitch deck. As a result, if the VCs
need something other than just a good version, well organized, with the
information clear, the spelling correct, of a business document, then they are
looking for something founders have no way to supply.

Many VCs seem to want and expect to be swept off their feet by some block
buster summer popcorn movie, but any such production is way too expensive in
time, money, and effort for a Series A and close to irrelevant for serious
business and financial work.

The firm is basically asking that the founder have a going business, at least
_traction_ and, to be realistic, likely earnings. Given the earnings, there is
considerable question if the founder needs or should accept an equity check.

E.g., in the past, a Web site startup needed big bucks for Sun servers, etc.
No more: $2000 in parts will build a very powerful server and the cloud can
supply a lot of _pay as you go_ server computing right away.

Given the traction of the startup, the firm thinks WAY to much of the
importance of their check. The OP has the simplistic notion that the VC check
will be the crucial enabler for future rapid growth; that view is in strong
conflict with how successful businesses commonly grow.

Net, the firm, for the whole process, is asking WAY too much and giving and
doing WAY too little.

Heavily that view of a Series A is from a dream version of the VC industry
from 10+ years ago. That part of VC is gone with the wind. There is still lots
of opportunity to make money in information technology startups, but ideas as
simple and profitable as, e.g., Hotmail, are long gone.

IMHO, computer science and VC funded startups are out of sufficiently good new
ideas, out of gas, at the end of the road. For computer science, programming
language syntax, parsing, compiling, linking, fundamental algorithms,
database, TCP/IP, etc. are rock solidly done work, but computer science
doesn't know what to do next. Similarly for VC -- projects as simple as
Hotmail are done. There is more to do and very much worth doing, but computer
science and the VCs need to find some new directions.

Again, once again, over again, yet again, one more time, we find that VCs who
desperately need very rare and very exceptional projects are proceeding with
simplistic attitudes no more serious than a family shopping for a standard
SUV.

There is a lot of very serious work in our economy in research, engineering,
law, medicine, national security, and parts of finance, but Sand Hill Road and
the OP are not nearly serious enough.

In the end, instead of the OP, a founder of a rapidly growing startup should
consider the common advice that they should just wait until a VC notices the
startup and contacts the founder. In the meanwhile, the founder should just
keep working on the business.

~~~
askafriend
I upvoted your comment because you make some good points, but I lost you
towards the end there when you boldly proclaim that we're out of good, big,
impactful ideas.

There is so much great work being done if you just look around a little bit.
The advances in computation photography this decade are incredible. AR will be
ubiquitous soon enough. VR has a chance to change how we communicate. There's
autonomous sailing drones scouring the seas and mapping them out, streaming
data back. There's tiny low cost satellites being launched frequently to image
the planet. There's rapid progress on electric transportation in full swing.

There's a lot of these areas that are funded in part by VC. The very nature of
VC ensures that the quality of firms also follows the power law so it's not
surprise that a majority of funds lack imagination. But if you look at the
really great firms, they're still investing in big ideas. Sure they may not be
the lowest hanging fruit in the field as you mention, but they aren't
precluded from being big, or impactful ideas driven by technology.

~~~
graycat
Yes, some of the photography is amazing. Part of the success is from some
optics math on depth of field -- better with small cameras, and the solid
state sensors permit that. E.g., the old idea was just a pinhole camera that
didn't have to focus at all. Then the electronics and software processing the
signal from the sensor can make the new, really small cameras look really
smart. And you may have still more advanced work in mind.

For AR and VR, I see some markets but am reluctant to expect wide usage.

The last really big idea was, what, Facebook? I know: There have been a lot of
$1+ billion exits since the start of Facebook, but I haven't kept up on the
_small fry_!!!

I started my career near DC in applied math and computing and there saw a lot
of fantastic national security projects from research. E.g., I was in the
group that did the Navy's version of GPS, before the USAF did GPS. There was
some really nice math, physics, and research, powerful stuff, in that group.
E.g., how to design a satellite that will orbit the earth not very high up and
have essentially no "drag" at all? Cute. Important.

In an important sense, GPS, etc., are _information technology_ (IT), but from
all I can see the role of applied math, physics, and research so heavily used
by US national security is missing from Sand Hill Road funded IT projects.
E.g., if I were looking for some promising background at Stanford, I'd go to
D. Luenberger, B. Efron, or P. Diaconis and not the computer science
department. At Berkeley I would have gone to one of my favorite authors, L.
Breiman, but of course eventually the computer science people did that to some
significant extent.

For Breiman's _boosting and bagging_ , I suspect some important connections
with _resampling_ and some math in a paper I published. I suspect that there
is a nice, more powerful, valuable way to explain such ideas, maybe with
connections with sufficient statistics. E.g., order statistics are always
sufficient. But such things are not relevant to my startup and, thus, on the
back burner.

Bluntly the US DoD, NSF, NIH, etc. eagerly support and exploit research with a
batting average much higher than VCs, while as best as I can see Sand Hill
Road, for IT projects, hearing _research_ , soils their clothes and runs to
the rest room. It appears that Sand Hill Road believes that the "technology"
in IT is mostly just software with no connections with anything new, correct,
and significant from research. Yes, they are pursuing AI and ML, but my view
is that those are not very promising directions.

The VCs need stuff that, among other things, is NEW, and we know where the
"new, significant, and correct" stuff comes from -- research. So far Sand Hill
Road for IT (but not for bio-medical technology) has with great determination
refused to have anything to do with research, even if already done, rock
solid, in production quality code. So the VCs just want to see traction,
significant and growing quickly "up and to the right". But the research is a
crucial part of estimating the future of the company, past current traction.

IMHO, Sand Hill Road needs to get serious about "new, correct, significant",
powerful and valuable in _IT_.

