How to fundraise for Series A from a position of strength

Series A

Despite the pandemic, we see encouraging signs of a strong recovery in funding deals all across Southeast Asia. From just the first half of 2021 alone, a total of US$915 million was raised from 16 different funds, with a fair amount going to Seed and Series A stage companies. Though this was lower than the same period in 2020, we are hopeful that ample dry powder is still available to deploy.

SEA Investments (2015-2021) US$ Bn (Source: Tracxn. Data extracted on 05 Apr 2021)

As a startup founder, how can you ride the wave and best position yourself for series A funding? Having spent several years in the ASEAN startup ecosystem, I would like to share my observations and tips on raising funds.

In summary, having the right timing, positioning, capacity building plans, and market expansion plans help raise your chances of success.

Timing: When should I raise a Series A funding?

Raising Series A is a different ball game than raising the earlier rounds, and… the timing matters.

I have observed many founders jumping into this process prematurely, often way before their business is even set up to handle the complexity that comes along with external funds. Consequently, they fail to pitch successfully and secure the funds they need.

Think about this, how would you be able to land safely — if you are flying and building a plane simultaneously?

The right time to raise a fund is when:

  • You have built out your skeletal team
  • Your market has been validated to a certain extent
  • You have a valid business model that is (somewhat) scalable and replicable

Positioning: How much do I raise and at what valuation?

It may sound cliche, but I suggest beginning with the end in mind. Since the funding raised will ultimately be channelled into helping you achieve your next business milestone, such as the expansion of your team or scaling into a new market, ask yourself:

What is the next business milestone that my startup is planning towards, and how much time would be needed to reach that point?

The quantum of raise varies depending on what you, as the founder, seek to achieve. For example, Grab raised their maiden round of US$2.15M with us to venture overseas, and Sunday Insurance raised US$10 million for scaling overseas at series A too.

How much time you would need to achieve the next milestone also varies from business to business. But typically, 18-24 months would likely be sufficient to focus on the 2-3 business milestones that you are aiming towards.

You should also be aware of your monthly burn rate, that is, your monthly spending, to attain the desired milestones. From there, work backwards, and you will be able to determine how much money you need!

[(Monthly Burn Rate) x Number of months needed to achieve business milestones] + additional costs = Funding Needed

Also read: How to win term sheets and influence investors: Notes from founders of NewCampus, Snapask and Flickstree

It is always tempting to raise more than needed. But I would caution against that, as raising too much capital early on can lead to over dilution.

Naturally, your investors often take the biggest risk to fund you early, so they would ask for a proportionally more significant stake for each dollar invested in return for the risks they would incur.

The other question would be, at what valuation should I be raising. In my experience, founders often tend to ask for a relatively high valuation though it is early in your startup journey. But instead of doing that, I would suggest aiming for a fair valuation and then seeking reasonable adjustments through the future fundraising rounds.

If your current valuation is too high, it may become a significant source of friction with your investors if you fail to deliver. We have witnessed some startups fixated on the high valuation– to which investors agreed to fund them, yet their companies were unable to execute the business plan.

That led to the aftermath of downsizing and losing talent, managing upset investors, and the stress of seeking a white knight or raising loans to bridge the performance. It is just not worth putting yourself through such a grind.

On the other hand, if you can consistently execute your business plan, your investors will be more inclined to follow on and give you more money to reach your next goal.

At Vertex Ventures, we believe that the most sustainable way to increase a startup’s valuation for the next round is to ask for a reasonable amount, execute well, and deliver on your milestones. I’ve seen this working time and time again for founders through the years.

Capacity building: My internal strategic partners?

Invest in your Human Resource (HR)

An often overlooked function, founders tend to take on the HR role or delegate it to junior staffers. However, founders must recognise the need to develop a carefully thought-out approach to hiring, developing and retaining talents to fuel business growth as you expand.

You are your company’s best recruiter, and you will be speaking with candidates all the time — deliberately or otherwise. You will need to scale yourself by involving junior staff (who shows the potential to grasp and grow into the role) to join you as you interview and dialogue with candidates.

HR is essential to this, and you would want to build a dedicated HR ‘team’.

Bring onboard someone with the financial know-how

Having a high-performing finance person can go beyond merely balancing the books. This role is strategic, and the finance person’s role stretches across different functions and competencies that will help your startup thrive and grow, such as setting and scrutinising critical metrics like your CAC and CM, not to mention optimising cash flow which is the oxygen for your startup.

They may also aid you on your fundraising and exit processes, investor due diligence and construction of sensitivity and scenarios analysis etc.

Market expansion plans: Who should I send?

Though Singapore is a great place to trial, pilot, test and validate, it is typically too small a market to support 10X growth.

If you are growing your business, you should set your sights on expanding overseas. Vertex Ventures’ portfolio companies such as Grab, Nium, Patsnap, Speedoc and more have raised Series A and ventured beyond Singapore.

However, overseas expansion does not come without its challenges. Nuances in culture, language, ways of doing business and competition are among key considerations. So, how to expand successfully into new markets? Should it be at all cost? I don’t think it should be.

Founders need to be thoughtful and strategic about expansion plans– the reasons for the markets you choose to expand into first could be the availability of the right customers, infrastructure or size of the market.

Case in point

Elena, the co-founder of our portfolio company Turnkey Lender, had taken the initiative to relocate her family to Austin, Texas, just before Singapore shut her borders last year due to COVID-19.

It was unsettling for us as investors and board members. However, both Dmitry and Elena (as founders) felt this was the right thing to do as they have seen strong inbound interests for their digital lending platform.

Kudos to her, Elena was able to get the legal paperwork sorted out, hire the first team members (all within a micro-budget), and now, the US market accounts for more than 50 per cent of the company’s revenue.

While we see what is on the front end and celebrate it, we must acknowledge the hard work behind the scene where Dmitry and Elena were juggling zoom calls with teams spread across markets (US, Ukraine, Poland, Malaysia, and Singapore) and timezones. We had witnessed the superb teamwork between the founders and the senior team members.

When planning the expansion — check and see you have fighters and go-getters whom you can send to plant your flag abroad, all within a reasonable budget.

Parting words

Raising Series A is an exciting phase in your startup journey. It will be a different experience from raising your seed round, as investors at this stage tend to be more demanding.

As such, it is essential to make sure you are raising at the right time, for the right reasons and at the correct valuation.

There is no good in rushing things. Don’t put the cart before the horse — prepare your startup well, way before you even start asking for the cheque.

Do this so that when you do fundraise, you are coming in from a position of strength.

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic.

Join our e27 Telegram group, FB community, or like the e27 Facebook page

The post How to fundraise for Series A from a position of strength appeared first on e27.

,
Series A

Despite the pandemic, we see encouraging signs of a strong recovery in funding deals all across Southeast Asia. From just the first half of 2021 alone, a total of US$915 million was raised from 16 different funds, with a fair amount going to Seed and Series A stage companies. Though this was lower than the same period in 2020, we are hopeful that ample dry powder is still available to deploy.

SEA Investments (2015-2021) US$ Bn (Source: Tracxn. Data extracted on 05 Apr 2021)

As a startup founder, how can you ride the wave and best position yourself for series A funding? Having spent several years in the ASEAN startup ecosystem, I would like to share my observations and tips on raising funds.

In summary, having the right timing, positioning, capacity building plans, and market expansion plans help raise your chances of success.

Timing: When should I raise a Series A funding?

Raising Series A is a different ball game than raising the earlier rounds, and… the timing matters.

I have observed many founders jumping into this process prematurely, often way before their business is even set up to handle the complexity that comes along with external funds. Consequently, they fail to pitch successfully and secure the funds they need.

Think about this, how would you be able to land safely — if you are flying and building a plane simultaneously?

The right time to raise a fund is when:

  • You have built out your skeletal team
  • Your market has been validated to a certain extent
  • You have a valid business model that is (somewhat) scalable and replicable

Positioning: How much do I raise and at what valuation?

It may sound cliche, but I suggest beginning with the end in mind. Since the funding raised will ultimately be channelled into helping you achieve your next business milestone, such as the expansion of your team or scaling into a new market, ask yourself:

What is the next business milestone that my startup is planning towards, and how much time would be needed to reach that point?

The quantum of raise varies depending on what you, as the founder, seek to achieve. For example, Grab raised their maiden round of US$2.15M with us to venture overseas, and Sunday Insurance raised US$10 million for scaling overseas at series A too.

How much time you would need to achieve the next milestone also varies from business to business. But typically, 18-24 months would likely be sufficient to focus on the 2-3 business milestones that you are aiming towards.

You should also be aware of your monthly burn rate, that is, your monthly spending, to attain the desired milestones. From there, work backwards, and you will be able to determine how much money you need!

[(Monthly Burn Rate) x Number of months needed to achieve business milestones] + additional costs = Funding Needed

Also read: How to win term sheets and influence investors: Notes from founders of NewCampus, Snapask and Flickstree

It is always tempting to raise more than needed. But I would caution against that, as raising too much capital early on can lead to over dilution.

Naturally, your investors often take the biggest risk to fund you early, so they would ask for a proportionally more significant stake for each dollar invested in return for the risks they would incur.

The other question would be, at what valuation should I be raising. In my experience, founders often tend to ask for a relatively high valuation though it is early in your startup journey. But instead of doing that, I would suggest aiming for a fair valuation and then seeking reasonable adjustments through the future fundraising rounds.

If your current valuation is too high, it may become a significant source of friction with your investors if you fail to deliver. We have witnessed some startups fixated on the high valuation– to which investors agreed to fund them, yet their companies were unable to execute the business plan.

That led to the aftermath of downsizing and losing talent, managing upset investors, and the stress of seeking a white knight or raising loans to bridge the performance. It is just not worth putting yourself through such a grind.

On the other hand, if you can consistently execute your business plan, your investors will be more inclined to follow on and give you more money to reach your next goal.

At Vertex Ventures, we believe that the most sustainable way to increase a startup’s valuation for the next round is to ask for a reasonable amount, execute well, and deliver on your milestones. I’ve seen this working time and time again for founders through the years.

Capacity building: My internal strategic partners?

Invest in your Human Resource (HR)

An often overlooked function, founders tend to take on the HR role or delegate it to junior staffers. However, founders must recognise the need to develop a carefully thought-out approach to hiring, developing and retaining talents to fuel business growth as you expand.

You are your company’s best recruiter, and you will be speaking with candidates all the time — deliberately or otherwise. You will need to scale yourself by involving junior staff (who shows the potential to grasp and grow into the role) to join you as you interview and dialogue with candidates.

HR is essential to this, and you would want to build a dedicated HR ‘team’.

Bring onboard someone with the financial know-how

Having a high-performing finance person can go beyond merely balancing the books. This role is strategic, and the finance person’s role stretches across different functions and competencies that will help your startup thrive and grow, such as setting and scrutinising critical metrics like your CAC and CM, not to mention optimising cash flow which is the oxygen for your startup.

They may also aid you on your fundraising and exit processes, investor due diligence and construction of sensitivity and scenarios analysis etc.

Market expansion plans: Who should I send?

Though Singapore is a great place to trial, pilot, test and validate, it is typically too small a market to support 10X growth.

If you are growing your business, you should set your sights on expanding overseas. Vertex Ventures’ portfolio companies such as Grab, Nium, Patsnap, Speedoc and more have raised Series A and ventured beyond Singapore.

However, overseas expansion does not come without its challenges. Nuances in culture, language, ways of doing business and competition are among key considerations. So, how to expand successfully into new markets? Should it be at all cost? I don’t think it should be.

Founders need to be thoughtful and strategic about expansion plans– the reasons for the markets you choose to expand into first could be the availability of the right customers, infrastructure or size of the market.

Case in point

Elena, the co-founder of our portfolio company Turnkey Lender, had taken the initiative to relocate her family to Austin, Texas, just before Singapore shut her borders last year due to COVID-19.

It was unsettling for us as investors and board members. However, both Dmitry and Elena (as founders) felt this was the right thing to do as they have seen strong inbound interests for their digital lending platform.

Kudos to her, Elena was able to get the legal paperwork sorted out, hire the first team members (all within a micro-budget), and now, the US market accounts for more than 50 per cent of the company’s revenue.

While we see what is on the front end and celebrate it, we must acknowledge the hard work behind the scene where Dmitry and Elena were juggling zoom calls with teams spread across markets (US, Ukraine, Poland, Malaysia, and Singapore) and timezones. We had witnessed the superb teamwork between the founders and the senior team members.

When planning the expansion — check and see you have fighters and go-getters whom you can send to plant your flag abroad, all within a reasonable budget.

Parting words

Raising Series A is an exciting phase in your startup journey. It will be a different experience from raising your seed round, as investors at this stage tend to be more demanding.

As such, it is essential to make sure you are raising at the right time, for the right reasons and at the correct valuation.

There is no good in rushing things. Don’t put the cart before the horse — prepare your startup well, way before you even start asking for the cheque.

Do this so that when you do fundraise, you are coming in from a position of strength.

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic.

Join our e27 Telegram group, FB community, or like the e27 Facebook page

The post How to fundraise for Series A from a position of strength appeared first on e27.

Leave a Reply