How Big Should Your Series A Be?

You have done your seed round.  You raised somewhere between $500k-$1M.  Your business survived! (Yea!!) It seems like you have found product market fit.  All you really need is someone to believe in you, write a check and that money will allow you to put the pedal to the metal and really grow.

How big should your series A be?

It’s a tough question.  Series A rounds are getting bigger and bigger and bigger and bigger.  It sort of cracks me up a little. I see numbers coming out of Silicon Valley about a $10M Series A and I remember when valuations for companies were $10M at Series A.  As Chamath Palihapitaya asked, “Is it Cushman and Wakefield that is making all that money?”

It’s not as if all the risk in the deal has been wiped away when you go from seed to series A.  There still a chance that the company can fail.  There is a risk of failure all the way through the funding cycle until you exit.  At each stage of the funding cycle, I think it’s a good idea to examine your psyche and objectively analyze the business to see if it should be time to look for an exit or raise more money.

When you start to scale, there will be unexpected costs that crop up.  This isn’t that much different than when you launched, unexpected things happened.  The unexpected burns working capital.  It also can slow scaling.  It might be first world problems like trying to find enough talent to fill positions.  It might also be real problems like the original code needs to be re-formatted for a bigger business.

Looking at it from the entrepreneur’s perspective, they bootstrapped and never had much money.  They did a seed, never had much money and now they think they have got it.  They feel more security with a lot of money in the bank.  But the truth is, they aren’t that secure.

Many times I have had trades on where they looked spectacular on my statement.  But, when I got out of them they didn’t look so hot.

The entrepreneur might also think that this will be the last round they do because their Excel spreadsheet says they will be “cash flow positive” after this round.  They might be.  But, they probably won’t be able to grow their business from cash flow.  They will be too early for equity markets, and too small for debt markets.  Raising another round of VC will be the only way to go.

Raising capital tends to be like being a heroin addict.  You do it until you exit, or die.

I think it behooves entrepreneurs to really get a handle on how much they need at a valuation range to scale a little.  If they hit that metric, the next round will be bigger.  Taking in less cash at earlier stages is also smart capital table management.  Your equity is your stock.  Ideally you want to sell your stock at higher and higher prices, not lower.  Ideally, you want to sell the most amount of stock at the highest price, not lowest.  If we know that at exit, most founding entrepreneurs only own 10%-15% of their company, then selling less of it at earlier stages is better for them.

Series A rounds in the $2-$6M range are nice sized rounds.  That means a pre-money of $8-$24M.  It allows you enough runway to scale, start building out a team and most importantly acquiring customers.  Increasing top line revenue is the best way to increase bottom line revenue.

Considering most companies that are venture backed sell for under $60M, you are part of the way there.  Series A rounds let you sniff the air to confirm if you truly have a blow out business.  It’s the Series B round that helps you decide if you can build a blow out business, or not.