Early-stage startups have more competition than in previous years for Series A rounds as venture capital firms focus on more mature companies with established profitability potential. As funding dries up for Series A rounds, some startups who might have quickly soared through the round in past years are instead remaining at the seed stage to build more capital, giving their business more time to reach peak revenue growth. To keep VC investors interested in your company, even more effort will need to go into improving revenue potential to move past the seed stage to more aggressive fundraising.
Why are Series A rounds more challenging in 2023?
The pandemic brought major changes for the entire startup industry and that’s been particularly explicit in terms of fundraising. Mid- and late-stage investors, as well as more than 1,000 new micro funds, began pumping capital into seed stage startups, creating a surge of new businesses bolstered by VC funding. These investors were drawn to lower share prices and smaller private-market valuations that came with seed stage investments.
Funding for Series A rounds, unfortunately, has not seen the same levels of investor interest due to one major reason: an increased focus on profitability over growth potential. Now startups that quickly accumulated seed funding are struggling to graduate to the next level, and some of those startups that benefited from the 2021 boom in seed funding are now forced to shutter their doors because securing additional funding, particularly at the Series A level, has become a daunting challenge.
The Series A cooldown is especially evident when looking at the median time between seed and Series A rounds. According to estimates from market analytics firm Crunchbase, the average time between the rounds was only 14 months in 2014. That grew to 21 months in 2022 and in 2023, that period expanded even further to 25 months. Again, that’s just the average.
Based on previous timeframes, at least half of startups founded in 2021 would have moved on to Series A by now. Instead, many of these startups are lingering in the seed stage. In 2018, as of August, half of the startups that raised at least $1 million in seed funding went on to a Series A or post-seed round, according to Crunchbase. By comparison, the 2021 cohort only had about 24% go to a Series A round or beyond while the figure sits at just 6% for the class of 2022.
Moving on to Series A rounds is an important milestone for startups as it acknowledges that the startup has graduated from “just” a good idea to a viable business. Investors have more confidence in a startup’s business plan and its potential once it passes Series A. To find success in the modern Series A environment, your overall strategy needs to match the new environment in a way that boosts revenue, improves your pitch deck and raises awareness of your startup within your industry.
Moving on from a growth mindset
Now is the time to conserve and get creative with budgets to produce the best possible return on investment that will attract investors. To achieve these goals, the growth at all costs mindset needs to be moved down the priority list. In past years, scaling a business was one way to prove to investors that your business model was viable, but current circumstances have led investors to value profitability and revenue potential over exponential growth. Hiring and training new employees can be a drain on your runway and eat into profits, so keeping teams trim for the time being could be your safest option.
Moving on to Series A rounds right now, or even in the near future, may not be the right path for your company. If your startup has the funding to continue operations at its current pace, remaining at the seed stage could give you a chance to put yourself in a stronger position to raise a Series A round down the line.
Getting customers on board and keeping them there
The best, but most challenging, strategy for startups to find success in today’s Series A funding round is to improve your profitability. Look first to your customer base and make the effort to understand them completely. If you haven’t already, consider distributing a customer survey to get insight into their interests, practices and habits, as well as how satisfied they are with your product or service. Investors will absolutely ask about your customer base, so it pays to be overprepared so you can answer any question they ask with confidence and clarity.
Reaching potential and returning customers is another way to expand your reach. Marketing and outbound sales efforts are often erroneously pushed to the back burner by founders with many priorities. A well-defined marketing strategy designed to reach and engage your target market will help make an impact on potential investors. At the very least, it’s recommended that you provide an outline of your marketing and sales plan, including how and through which channels you plan to acquire new customers, branding initiatives and competitive positioning. Having a ready plan demonstrates to investors that you understand the market dynamics, even without a marketing background.
Get out there
Startup events, particularly in St. Louis, have begun again in earnest following a pause over the last three years due to the COVID-19 pandemic. Expos, conferences or casual networking events give you an opportunity to speak with people outside your company before meeting with VC investors. Use this opportunity to explain your business model and try to talk it out with people in and outside of your industry. This is a great way to make business connections and to hone your VC presentation strategy.
Cultivating a relationship with VCs takes time and a great deal of effort, so make sure to invest time in attending startup events, especially industry events where you could potentially find industry partnerships with a larger corporation that believes in your product or service. Developing a relationship with larger players in your industry can impress VC investors by showcasing your involvement in the industry and your ability to draw others to your company.
Meeting with the VC firm
Before meeting with a VC firm to pitch your company in front of investors, make sure to research the firm to better understand its investment thesis, preferred industry sectors and portfolio companies. Use this information to tailor your pitch to align with the VC’s interests, potentially increasing your chance of success.
As you’re performing due diligence on the VC firms you approach, give your own company the same level of due diligence. Consider reaching out to a mentor or mentor group in your industry to help you access a different perspective you can use to enhance your prospects.
Review your pitch deck as well. If it includes industry jargon that people outside the industry may not be familiar with or struggle to understand, take the time to explain yourself. Don’t speed through concepts you assume investors will understand or glance over your plans to attract customers or users. Also take this opportunity to highlight your team’s experience, talent and ability to execute the business plan. This helps establish your team as cohesive and driven to achieve your startup’s goals.
It may also be tempting to try to minimize or hide risks within your business plan when speaking with investors, but resist the urge. It’s much better to be transparent and demonstrate your thorough understanding of the associated risks of your startup. A comprehensive risk mitigation strategy can help instill confidence in potential investors and shows how thoroughly you’ve researched every aspect of your business, especially when it comes to legal implications. Taking your time on these details is an important way to impress upon investors that you know what you’re talking about.
While graduating to a Series A funding round will be especially challenging as the startup industry continues to recover from the pandemic in addition to disruptively high interest rates and inflation, it is not impossible. Improving your business from within, performing extensive research on your potential investors and resisting the urge to return to a growth mindset at this stage may help bring you more success.
Anders CPAs + Advisors works with startups and entrepreneurs on their financial needs so they can focus on what they do best. Learn more about the Anders Startup Group to discuss capital raising options for your startup.
Every day at Anders, we serve as a catalyst for those striving to achieve their highest potential and carry this mentality on to our clients and community. Through a collaborative approach and a combination of tax, audit and advisory services, we help our clients achieve their goals.
Dave Finklang has wide-ranging, specialized experience in tax planning and compliance, startup services and consulting, and accounting services. As a tax partner and leader of the firm’s startup practice, Finklang enjoys working with entrepreneurs and emerging companies by helping them raise capital, structure their businesses and minimize their tax burdens.
