An investor’s guide to surviving the Series A crunch

This is a guest post by investor Jon Soberg

It’s almost 2013, and many seed-funded companies are hoping the New Year will yield a big, fat Series A check. As we all know, and as the recent report from CBInsights reminded us, there is a “seed cliff” that is showing no signs of letting up.

As a seed-stage and first-round investor at Blumberg Capital, I sit right in the middle of this purported “crunch.” We mostly do seed funding, but about a quarter of our investments start with Series A. We see consistent deal flow coming in for both, and we have a number of companies that are looking for follow-on funding. I am spending much of my time these days helping our seed-funded companies with their fundraising strategy. In light of recent media reports, here’s what I’m telling my startups: Plenty of companies are getting Series A funding, and if you play your cards right, so will you.

I have reiterated to our CEO’s that if they build a solid company, they will be able to raise funding. The numbers show that Series A financings have remained fairly stable, but more companies were able to gain seed funding in the past few years. This means the balance of power at Series A rests with the investors who are patiently waiting for the best companies to walk in the door before they write checks. The ramification for founders is that there’s far more competition — you better bring your “A” game, no pun intended.

With the balance of power shifting to the VC, here are my rules to stay afloat:

Rule #1: Make sure you have enough runway.

I’m sure you are all thinking, “Duh, tell me something I don’t already know.” I’m not talking about raising a large seed round, and there have been many articles written about that, including a recent one from VentureBeat. When I say make sure you have enough runway, I’m not talking about simply looking at a product roadmap or business plan, and recognizing that you will likely run out of money and need to raise in “X” months. I’m talking about proactively managing that runway, and in some cases making the tough calls early. Take it from someone who has personal experience shutting down a company after the investors didn’t continue to fund it — it’s painful! So, let me give you two examples from recent experience.

Rule #2: Make drastic decisions; take cuts if necessary

This time last year, in a startup’s board meeting, we took a careful look at our plans for 2012. We had runway until May, and the base plan was to raise money in February or March. We had a lot of customers in the pipeline, but revenue was low, and customer on-boarding was taking longer than anticipated. We had a couple of meetings with investors, and it was clear we weren’t ready. We decided immediately to cut the burn pretty substantially to give ourselves another six months of runway, without expecting much in the way of revenues. We all agreed that we needed the time because we didn’t have full control of the onboarding or the fundraising. The plan was to take the company profitable on a low burn, and then expand with revenue (or opportunistically, financing). It wasn’t easy — the founders took cuts, and we needed to adjust equity compensation.

In about July, the ramp really started to accelerate, and today, the company is making about $100,000 per month in revenue with high margins. We are expanding, and will likely raise capital in 2013 to fund further growth, but we wouldn’t be here talking about it had we not made the course correction early. Today, we control our destiny because we don’t particularly need to raise capital.

Rule #3: Consider a gradual approach to fundraising

Another company, where I’m on the board, has taken a careful and gradual approach to fundraising. They were also faced with a short runway and minimal revenues. They made sure their operational costs were lean, but didn’t make any drastic changes. Rather, they went out and put together a small round, adding about $500,000 and extending their runway by at least six months. They subsequently added another $800,000 at a slightly higher valuation because the metrics continued to improve. If you had asked them two years ago about fundraising plans, I can assure you they didn’t look like this, and there is far more dilution than anticipated. However, it’s better to own less of a real company than to own a whole lot of nothing.

Rule #4: Time is your ultimate weapon. Use it wisely! 

In both of these cases, the entrepreneurs pro-actively looked very objectively at their businesses, and made adjustments in the face of harsh realities. They are both continuing to thrive. As you re-assess your priorities heading into 2013, here are a few tips. These are things that will help you build your business, and rise above the fray in fundraising.

• Time is your most precious asset. The more runway you have, the more opportunity to succeed and attract funds. It is much easier to raise when you don’t need to.
• If you can take control of your destiny, do it. You know what makes a business attractive? Profitability, and the potential to scale. Build the base from which you can scale.
• De-risk your business. Series A investors are not looking for businesses with a lot of questions that remain to be answered. They are looking to scale businesses based on solid proof points. Take the time to prove your unit economics! If you’re focused on the enterprise, show some solid clients and understand your sales cycles; if you’re consumer, know your acquisition channel and costs.
• Hire: Get your key team members in place.
• Do your homework on potential investors. This goes without saying, but I continue to see companies that spray and pray. With more seed companies seeking Series A financing, the companies that do their homework will differentiate, and more likely find compatible investors. This is especially true if you are a consumer business — the market has moved and many investors currently prefer business-to-business and enterprise investments, so find people who will invest in your space.

That said, on the whole I am very upbeat about the prospects for 2013, and wish you all a wonderful holiday season and a prosperous New Year!

Jon Soberg is a Managing Director at Blumberg Capital, where he invests in early stage companies, specializing in FinTech, SaaS, and eCommerce. Prior to joining Blumberg, Jon has been a serial entrepreneur and senior executive in multiple companies including Ditech, Broadband Digital Group and Adforce, which had a highly successful IPO.  

A CFA Charterholder and adjunct faculty in the Wharton Marketing Department, Jon earned a B.S in Engineering from Harvey Mudd College, an M.S. in Engineering from Northwestern University, and an MBA in Entrepreneurial Management and Marketing from the Wharton School, where he is a Palmer Scholar.

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