Investor Funnels for Series As(blog.ycombinator.com)
blog.ycombinator.com
Investor Funnels for Series As
https://blog.ycombinator.com/investor-funnels-for-series-as/
10 comments
"On average, the companies that raised As had 30 coffee meetings with individual investors. 50% of these meetings led to pitches to individual partners. About 30% of partner pitches led to full partnership pitches. On average, 1 of every 5 partnership meetings produced a term sheet."
Based on the above, it seems the average number of term sheets received by a company that successfully raised a Series A was 1.
This surprises me because (i) it's often suggested you need more than one term sheet to have a decent negotiating position, and (ii) a YC-backed company should be better placed than most to get multiple, so if they're not getting them, then who is?
Based on the above, it seems the average number of term sheets received by a company that successfully raised a Series A was 1.
This surprises me because (i) it's often suggested you need more than one term sheet to have a decent negotiating position, and (ii) a YC-backed company should be better placed than most to get multiple, so if they're not getting them, then who is?
> This surprises me because (i) it's often suggested you need more than one term sheet to have a decent negotiating position, and (ii) a YC-backed company should be better placed than most to get multiple, so if they're not getting them, then who is?
It's pretty hard to get more than one because every deal is on its own timeline (you didn't meet all the prospective investors on the same day, and each has its own internal timeline modulated by people being around and internal process). If you're really hot (and this is easier in later rounds where your A investor(s) can whip up interest) perhaps you'll get lucky, but most deals aren't, even really good ones. In fact being "hot" in your A round might be a negative predictor (I don't know) just as most child prodigies flame out. FWIW, most of my financing have been multi-TS deals and none of them have been round A.
Also when someone issues a TS (see below) you can try to run around and use it to speed someone else up. That's hard, because the person who gave it to you will pressure you to sign immediately lest the deal explode.
However you do have useful negotiating strengths even when you have only one TS. It's hard to issue one: every firm is unique but often you have to get all or most of your partners to agree; typically you only do one or two companies a year and the firm as a whole few, so nobody wants to write a TS and then not get the deal: they persuaded their partners that this is the one!. So you can push back on egregious terms, and propose alternatives to things you'd prefer were too different. If you push too much they can walk away (and then the partner will tell their partners "wow, we dodged a bullet; that CEO would have been an asshole to deal with". But don't let it get to that point.
Another way that I've done for my last two projects was write the terms ourselves and issue our own term sheet. You're already implicitly doing this as you discuss what you're looking for before getting terms from an investor so why not simply propose a deal up front? Later stages are practically that way already as the earlier rounds will have constrained various things. This works if your team already have track records of investors making money.
It's pretty hard to get more than one because every deal is on its own timeline (you didn't meet all the prospective investors on the same day, and each has its own internal timeline modulated by people being around and internal process). If you're really hot (and this is easier in later rounds where your A investor(s) can whip up interest) perhaps you'll get lucky, but most deals aren't, even really good ones. In fact being "hot" in your A round might be a negative predictor (I don't know) just as most child prodigies flame out. FWIW, most of my financing have been multi-TS deals and none of them have been round A.
Also when someone issues a TS (see below) you can try to run around and use it to speed someone else up. That's hard, because the person who gave it to you will pressure you to sign immediately lest the deal explode.
However you do have useful negotiating strengths even when you have only one TS. It's hard to issue one: every firm is unique but often you have to get all or most of your partners to agree; typically you only do one or two companies a year and the firm as a whole few, so nobody wants to write a TS and then not get the deal: they persuaded their partners that this is the one!. So you can push back on egregious terms, and propose alternatives to things you'd prefer were too different. If you push too much they can walk away (and then the partner will tell their partners "wow, we dodged a bullet; that CEO would have been an asshole to deal with". But don't let it get to that point.
Another way that I've done for my last two projects was write the terms ourselves and issue our own term sheet. You're already implicitly doing this as you discuss what you're looking for before getting terms from an investor so why not simply propose a deal up front? Later stages are practically that way already as the earlier rounds will have constrained various things. This works if your team already have track records of investors making money.
"It's pretty hard to get more than one [term sheet] because every deal is on its own timeline" - yes, but that's a symptom of a loose/poor/disorganized fundraise (IMO), not a hard and fast constraint.
To me, the whole point of running a tight and structured Series A process is that you have the various horses crossing the finish line at the same time so that you have multiple interested parties capable of issuing term sheets concurrently.
To do that, you need to operate essentially a cohort-based funnel. Which is my understanding of YC's Series A program - it provides the structure, batch-processing, and funnel clarity to help make this happen inorganically in case it doesn't organically.
The other big advantage of batch-processing is obviously more efficient use of time.
To me, the whole point of running a tight and structured Series A process is that you have the various horses crossing the finish line at the same time so that you have multiple interested parties capable of issuing term sheets concurrently.
To do that, you need to operate essentially a cohort-based funnel. Which is my understanding of YC's Series A program - it provides the structure, batch-processing, and funnel clarity to help make this happen inorganically in case it doesn't organically.
The other big advantage of batch-processing is obviously more efficient use of time.
In the very best of circumstances your approach would be optimal. And in fairness at later rounds or M&A this is what you hire an I banker for — To create an auction.
But the great majority of firms raising a Series A aren’t so obviously “Fundable” that they can reliably gin up a parallel set of term sheets. Consider that if it takes 30 VC outreaches to average one TS, what would it take to average two within an overlapping two week window (realistically these things expire)? A lot more than 60 I’d bet.
Another thing about this is that these aren’t bandits or oracles or black boxes you’re doing some kind of algorithmic search on. Ideally each pitch you do will give you feedback and practice to hone the pitch, market feedback on the actual underlying business, and possibly even introductions to helpful others (customers or rarely investors; VCs tend not to pass along deals they rent investing in because of signaling effects but intros / sharing does happen).
So a Series A raise is a path dependent process.
But the great majority of firms raising a Series A aren’t so obviously “Fundable” that they can reliably gin up a parallel set of term sheets. Consider that if it takes 30 VC outreaches to average one TS, what would it take to average two within an overlapping two week window (realistically these things expire)? A lot more than 60 I’d bet.
Another thing about this is that these aren’t bandits or oracles or black boxes you’re doing some kind of algorithmic search on. Ideally each pitch you do will give you feedback and practice to hone the pitch, market feedback on the actual underlying business, and possibly even introductions to helpful others (customers or rarely investors; VCs tend not to pass along deals they rent investing in because of signaling effects but intros / sharing does happen).
So a Series A raise is a path dependent process.
Good points, but I'm curious if getting multiple TSs is only true in "the very best of circumstances".
For instance - is 30 VC outreaches a stretch? Sounds like a day or two of focused efforts - cold outreach, working your network, etc. Heck, a BDR at any startup company is doing more than that outreaches PER DAY to clients - so is it unrealistic to expect CEOs to do that for something that's existentially important?
But even then, if 30 gets you 1 TS, why not optimize your effort to get to 60 or 90 instead? Surely it's not perfectly linear... but at least you know the order of magnitude of effort, right? And that still doesn't seem totally crazy to me.
BTW - I'm prepared to accept that "it's impossible"; perhaps I'm overly optimistic based on my own experience. Our Series A fundraise resulted in 4 TSs at the same time, not because we were "hot" like Facebook or because I was an amazing CEO/founder, but because I had experienced CEO/founder mentors guiding me in how to execute the process to achieve that exact outcome.
So net is I'm just not sure this isn't a "thing is hard and few people do it, therefore it's impossible" versus a "thing is hard, so you need to work backwards and do XYZ very well". And XYZ is just not widely known or even understood by those who do it, and is likely hard too.
Net of all of this is that this is why the YC Series A program is a great idea. It can provide best-practices and guidance to achieve "impossible" outcomes, and it is essentially systematizing a process that perhaps is more art than science.
That all said, to counter my own points - while there is probably some operational lift by running a perfect process, that effect is likely dwarfed by how compelling the startup is at that time. Is it growing 300%+ YoY with a huge vision? etc.
For instance - is 30 VC outreaches a stretch? Sounds like a day or two of focused efforts - cold outreach, working your network, etc. Heck, a BDR at any startup company is doing more than that outreaches PER DAY to clients - so is it unrealistic to expect CEOs to do that for something that's existentially important?
But even then, if 30 gets you 1 TS, why not optimize your effort to get to 60 or 90 instead? Surely it's not perfectly linear... but at least you know the order of magnitude of effort, right? And that still doesn't seem totally crazy to me.
BTW - I'm prepared to accept that "it's impossible"; perhaps I'm overly optimistic based on my own experience. Our Series A fundraise resulted in 4 TSs at the same time, not because we were "hot" like Facebook or because I was an amazing CEO/founder, but because I had experienced CEO/founder mentors guiding me in how to execute the process to achieve that exact outcome.
So net is I'm just not sure this isn't a "thing is hard and few people do it, therefore it's impossible" versus a "thing is hard, so you need to work backwards and do XYZ very well". And XYZ is just not widely known or even understood by those who do it, and is likely hard too.
Net of all of this is that this is why the YC Series A program is a great idea. It can provide best-practices and guidance to achieve "impossible" outcomes, and it is essentially systematizing a process that perhaps is more art than science.
That all said, to counter my own points - while there is probably some operational lift by running a perfect process, that effect is likely dwarfed by how compelling the startup is at that time. Is it growing 300%+ YoY with a huge vision? etc.
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The multiple term sheet negotiation strategy is generally a myth. [1] Most startups even the ones that are decently successful would be lucky to even get 1 given the enormous time sink (and seems to be corroborated by the data in the blog post - 30(+15+5) meetings for 1 term sheet!)
Also remember you have atmost a week to accept it.
(Unless of course you are piedpiper ;)
[1]https://stevecheney.com/on-vc-startup-myths/
(Unless of course you are piedpiper ;)
[1]https://stevecheney.com/on-vc-startup-myths/
an excellent link!
I would be curious (maybe @akharris can clarify) whether "average" in this case is the mean, mode or median...
I'd guess median because if the mean it appears that (cf parent) each company got exactly 1 term sheet, which does seem genuinely surprising if more or less the entirety of both cohorts succeeded in raising a round on some terms.
I'd guess median because if the mean it appears that (cf parent) each company got exactly 1 term sheet, which does seem genuinely surprising if more or less the entirety of both cohorts succeeded in raising a round on some terms.
Wow, even '30 coffee meetings' sounds exhausting.
And that's only the 'accepts'.
You have to put work into getting them, some will say no, you'll have to brush up on their firm, i.e. mini due diligence, and then manage all of that.
That's utterly a full time job for one person.
This seems so daunting to would-be CEO's, in such a critical phase of their company, they're almost going to be 'not present'.
I guess there's no way to serialize the Round A as there is with seed, i.e. 'demo day'.
And that's only the 'accepts'.
You have to put work into getting them, some will say no, you'll have to brush up on their firm, i.e. mini due diligence, and then manage all of that.
That's utterly a full time job for one person.
This seems so daunting to would-be CEO's, in such a critical phase of their company, they're almost going to be 'not present'.
I guess there's no way to serialize the Round A as there is with seed, i.e. 'demo day'.
This is sort of embarrassing for YC, so it's admirable they're sharing their surprise. Reads kind of like Breaking: people actually doing something know more about its practicalities than supposed subject matter experts. Points for honesty. I wonder if there's a VC model that could apply solutions to this category of issues from other domains (eg. traditional German trade schools) against the traditional founder/PE/VC structures to avoid such scenarios in future?
Also, the entire tier of coffee meetings don't really happen in Asia, we tend to do either meals or in-house presentations in my experience.
Also, the entire tier of coffee meetings don't really happen in Asia, we tend to do either meals or in-house presentations in my experience.
> This is sort of embarrassing for YC
Why?
Why?
Well they're shocked by the 30 number, despite having had investments in like 624 billion companies so far. You think they would have at least heard about something to this effect from their relationships with YC companies? Especially given the whole "YC is about the network"
How good is the network if it doesn't even give you the basic knowledge for a thing you are extremely likely to have to go through (Series A), right after YC itself?
How good is the network if it doesn't even give you the basic knowledge for a thing you are extremely likely to have to go through (Series A), right after YC itself?
> they're shocked by the 30 number, despite having had investments in like 624 billion companies so far
Handholding start-ups through their Series As isn't YC's core competence. If one could schedule two and a half meetings a day, on average, individual partner pitches could be had in 3 weeks. Give it 1 week for a partnership meeting and 1 week for a term sheet and you're talking zero to term sheet inside a month and a half. That's good. Unusually good.
YC's network serves to speed up the rate at which those 30 meetings get scheduled. Not change the fundamental dynamics of company-investor fit.
In any case, we have no baseline. It may be the case that 3% of YC coffee dates result in a term sheet while 0.3% of non-YC meetings do the same.
> You think they would have at least heard about something to this effect from their relationships with YC companies?
There is a lot of information buried in relationships that never surfaces because nobody is incentivized to ask. No CEO worth her salt will start waxing lyrical about all their failed coffee meetings when a term sheet on the table needs to be closed. And after the capital is raised, there are more pertinent questions for both sides.
Handholding start-ups through their Series As isn't YC's core competence. If one could schedule two and a half meetings a day, on average, individual partner pitches could be had in 3 weeks. Give it 1 week for a partnership meeting and 1 week for a term sheet and you're talking zero to term sheet inside a month and a half. That's good. Unusually good.
YC's network serves to speed up the rate at which those 30 meetings get scheduled. Not change the fundamental dynamics of company-investor fit.
In any case, we have no baseline. It may be the case that 3% of YC coffee dates result in a term sheet while 0.3% of non-YC meetings do the same.
> You think they would have at least heard about something to this effect from their relationships with YC companies?
There is a lot of information buried in relationships that never surfaces because nobody is incentivized to ask. No CEO worth her salt will start waxing lyrical about all their failed coffee meetings when a term sheet on the table needs to be closed. And after the capital is raised, there are more pertinent questions for both sides.
Despite all the rumours about a glut of capital, the stats indeed show that raising VC is not easy.
But to put things in perspective, it is common, even for great people, to go through job searches that are tougher than this. (despite all the rumours about a tech talent shortage)
But to put things in perspective, it is common, even for great people, to go through job searches that are tougher than this. (despite all the rumours about a tech talent shortage)
The idea of a conversion funnel for investment captures the real business model in play here. This is a marketplace in which the products being sold are business stories, and the audience is a very small group of wealthy consumers. Since the stories don't have to be tested against the real world, they can be perfectly tailored to the preferences of the buyers.
Does YC also provide any tools or standard processes around due diligence? I haven't been through enough rounds to know if there is any standardization between investors or if there is the possibility of encouraging such.
Would love to know about that too!
Has anyone created a commercially available CRM for this purpose?
Not sure how you would convince us it was a good sale in time for us to buy it. We'd probably also cancel right away.
We'd honestly probably use airtable or a commercial crm for this.
Sounds like a hard business.
We'd honestly probably use airtable or a commercial crm for this.
Sounds like a hard business.
Someone started one in Australia recently, but wound up pivoting. I think % of companies in fundraising state at any time is too tiny to present an easily addressable target market.
What was the Australian company?
Just checked. Can't find it. It was a sort of 'try this beta' -> feedback -> meh experience with someone who reached out via YCSUS2018. They definitely pivoted.
What features would this CRM have that would differentiate it significantly from say, Pipedrive?
Series A is defined as the first equity round (no matter the size)? So what is the funding mechanic of a "average sized" 5M seed round?
> On average, the companies that raised As had 30 coffee meetings with individual investors.
What does 'coffee meeting' specifically mean?
What does 'coffee meeting' specifically mean?
> What does 'coffee meeting' specifically mean?
Meeting at a coffee shop. Informal, short and stuffed in between the investor's scheduled work. Pitch deck may or may not come out.
One implication of a coffee meeting is there is a personal layer to the relationship. (Someone made an introduction, or you know each other from prior work. Website submissions don't tend to land coffee meetings.) It also signals a recognition, on both sides, that early-stage investing tends to require personal connections between founders and their investors.
Meeting at a coffee shop. Informal, short and stuffed in between the investor's scheduled work. Pitch deck may or may not come out.
One implication of a coffee meeting is there is a personal layer to the relationship. (Someone made an introduction, or you know each other from prior work. Website submissions don't tend to land coffee meetings.) It also signals a recognition, on both sides, that early-stage investing tends to require personal connections between founders and their investors.
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Average Series A:
* $5.3M raised pre-A
* $33M average pre-money valuation
* $10-15M average raises
* 80% have revenue, with ~$1M revenue to ~talk, and ideally $2M
So Series B is the new Series A, Series A is the new Seed II, and Seed.. oh whatever. Even more interesting when talking to investors who are unaware of the new reality. Fun times for fellow CEOs out there :)