I’ve written here quite often — perhaps too much — about what early-stage founders need to think about when graduating from seed stage to institutional Series A stage. I won’t go into that here, but another aspect of this journey has been highlighted in my mind that I want to surface and share on this blog: The Series A process is a “business role play” game where the VC is evaluating each interaction with a founder as proxy for how that founder would interact in different business environments — recruiting a top candidate, generating a high-value lead, closing a big sale, and so forth.
Yes, there are companies that score a quick Series A because its metrics are out of control and/or the team is known/proven. But, most cases out there aren’t so cut and dry; in reality, most Series A investments are basically “bets on the founder and team” even if there’s a bit of data here and there. We have seen countless Series A’s raised on spiky growth and then the company crumbles to the ground.
So, what happens when a great Series A happens in a company that’s not “growing like gangbusters” and is more of a speculative investment? What traits does the key founder (who is running the process) exhibit that makes this deal happen?
I believe there are three (3) core traits founders exhibit which can increase the likelihood that an institutional Series A can actually happen. Those traits are:
(1) Openness Around Information: Lately, I’ve seen a considerable number of founders be very cagey about sharing very basic information about their businesses. It’s the founders right to be selective about what is shared with whom, but on some level, if one is asking for a $5M+ commitment and don’t have a ton of offers, and if one is making it hard for the investor to get the basic information, it is a huge turnoff and the VC has 10+ other deals they can pursue with more clear information.
(2) Transparent In Conversation: Lately, I’ve seen founders who are not willing to be brutally upfront about how their business started, the twists and turns along the way, and how they got it from Point A to Point B. Of course, all of these real stories are messy. And, many VCs want to hear the more pretty vision for the future. Yet, in diligence, they will ask about the past, and I have seen quite a number of founders really get tripped up on sharing the journey. As a result, they become less transparent, even opaque, and as a result, the VC doesn’t feel a personal connection to the founder and can end up passing simply because they don’t have enough information to understand the journey the founder has been on.
(3) Diligent Follow-Up: This is the one that kills me because it’s basic Business 101. It blows my mind that a great VC who is looking at a business can ask for 2-3 follow-up items from a founder and literally the founder won’t follow-up. Maybe they forgot, they didn’t write it down, or they’re really busy parallel-processing. Whatever the excuse, this behavior leaves stale breadcrumbs for the VC to chew on — “if he/she isn’t following-up with me, are they on top of their stuff for other matters?”
I know VCs themselves aren’t perfect and can at times be cagey, can not be transparent, and don’t follow-up, but this is about those cases on the margin where it’s not a slam dunk deal and the founder is asking for money and a commitment. In those cases, which are the majority of cases, these three (3) traits are absolute table stakes for a founder to have a chance to be successful in the fundraise. Any slips here, and you’re likely out of luck.