The reality of Series A: Grey Hair Boards, Loss of Sales, Frustrating Lawyers, Super CFO's
Here are some observations on the current state of play within fundraising, from someone involved in three Series A rounds in 2017.
During my career I have been involved in a more seed rounds than I care to remember, a bunch of Series A and also later rounds. I have even been involved in a Nasdaq IPO so you get to know the true reality of what's ‘actually’ involved as opposed to listening to someone sat on a panel, who has probably never actually done any of the above (unless they are a rare exception to the rule), saying how easy it is.
I have also seen how the current economic climate and current success landscape can change how these things work or are influenced.
In 2017 I was close to three Series A from start to finish and also a Series C. One series A in particular I was really close to, being part of that company in a senior role.
So, with one of the Series A rounds only closing the last business day before Christmas, I thought I would share what I observed towards the end of last year. As an FYI, none of the C-level people involved in all of these were fresh faced (please don’t take offence) and all have massive experience in raising money, are serious C-level players and heavily invested themselves in their companies. This is by no means a full list of how to do a Series A, more an observation on the current state of play.
How many people do I hear say “A Series A only takes a few months!”? Sometimes that may well be the case, but the four companies last year took: nine months, eight months, eight months and the Series C is on it’s twelfth month and counting. Like I said, that’s with really experienced, smart people around the table who have been around the block a few times.
VC deal flow
I am not sure any of the VCs involved in the deals I am speaking about would admit this to me but I get the feeling they have the pick of the bunch in terms of deals they want and can do. I get the feeling out there in the UK, overall cash being invested is the same but on fewer deals.
All the deals I am speaking about have one thing in common when it comes to the board: grey hair. All the VCs involved in the deals look at the team, both senior management and board and decide if they can deliver, no BS just do what they say they are going to do. I am seeing this more and more for business. We can all kid ourselves that energy will pull things over the line but that's only part of what's needed.
You will need money. Whether we like it all not, the reason we are going for a Series A is because we need cash and need to invest to speed up the cycle. Companies at this stage always sail close to the wind on cash flow and even though you may keep costs down, if you thought a Series A was going to be done in six months but ends up being nine there's a chance you are going to run out of cash. So find other options. Convertible loans are great although there are some challenges around cleaning them up later. All the companies I have been involved in have some fantastic current shareholders to support the business or bring in new shareholders. There is also the good old bank overdraft for very short term as well, although possibly expect to personally guarantee it. Either way you will need extra money.
Yep, lawyers. As a guy who has just taken a stake in a legal firm, this area really frustrates me and here is why. Lawyers seem to have a desire to not come up with all the issues and changes in one go. You could argue that the process evolves during a Series A, but frankly, in most cases, it doesn't. There is some good news. On one particular Series A we used Field Fisher. We also approached Pinsent Mason as well. Now you would expect them to not even be close on the costings for this but they were and that didn’t mean throwing juniors at the job. I can honestly say, having dealt with these particular companies on other deals, they are great (please note, there are of course many other great lawyers). So my advice is, if you want to use a large legal firm, don’t make assumptions about their pricing, speak to them and you will see they are in for the long game in most cases. Build a relationship with them.
On the issues side. Trust me, I watched people get ‘all’ the issues out early on in the process and still it didn't change things.
So at Series A you are most likely going to have a tech due diligence and commercial due diligence carried out. One of the things I do as an advisor to a board or in a formal board role is always make sure that, when it comes to this, the company is almost more grown-up than it should be. I have watched too many companies fail at this stage or try and hide things only for it to come out and challenge a deal. This is about being open but also making sure that things are in place many months before. Another tip, some of the reports you get back you might not like reading parts of, but take the feedback on board and actually in some cases some recommendations that fall outside of your deal are probably useful. After all, yes the DD is written by a third party your potential investor is bringing in, but if the deal is going to go through then some of the feedback may affect your milestones.
Back in the day I used to see a lot of Series A milestones based on technology. Why? Because technology usually fails to deliver on time, cost and product so the milestones would have penalties. Still the case with some deals but I was surprised by the lack of milestones against technology. It might be the case that I have surrounded myself with companies that have super strong tech and product teams.
What I have seen is milestones that are all based on short term sales targets and cashflow. I am not talking year three, but certainly the first 15 months.
A strong financial director
Whether you like it or not you will need a strong, hard working financial director. It used to be you could recruit an FD after you closed a Series A but not anymore. In 90 percent of the deals I have been around in the last three years, I have seen strong, well placed FDs have to support the Series A process. Little tip also, pick your own FD otherwise the VC is most likely to put one of their choice in place.
Your business will be affected
It's a harsh truth but your business will be affected during the process. The time demands are big especially near the end of the process and if your CEO and founders are key to sales then it's a highly likely that sales will be affected in a not great way.
Engage your team
Most people in your company have probably never been through a Series A, or even actually be aware of what it means. The same can be said for some shareholders. Engage them and communicate with them to help understand the challenges ahead.
Finally those who never got a series A round
So this is common whatever the climate but I saw a lot - and I mean a lot - of people go after Series A when they were not ready and still to early, but oh did they listen, no. Months and months of wasted time, chasing VCs who were probably telling them the same and not just fobbing the company off. Follow that with the new arrogance I am seeing from early stage companies (it’s a particular type of founder) who won’t budge on deals and thus end up wasting a ton of time and money. Seriously guys, sit down with a journal and take a good look at yourself and start with the headline: timewasting.
So I have no idea what 2018 will bring for people raising money, let alone later rounds. I would make up your own mind and assume what happens in January 2018 might not be happening in May of 2018. Speak to those who have recently done a Series A+ on the founders side. Preparation is key. Even if you are thinking about doing a Series A in 12 months time, prepare now, then prepare again.
David Murray-Hundley "The Grumpy Entrepreneur"