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May 2022

Series A Q&A With Paul Hsiao: Secrets Of A Seasoned VC

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In last year’s frothy fundraising environment, it was easy to forget how hard it once was to raise a Series A. As many founders will now experience, it’s not always quick and easy to raise funds at the early stage. As a two-time founder myself, I know the ups and downs. Having been an investor for the past 17 years, I’ve reviewed thousands of pitches and have helped more than 300 companies raise money for Series A (and B and beyond). Whatever the funding landscape, there are certain strategies founders should always rely on when raising a Series A. In this blog I’ll answer questions about those need-to-know strategies, as well as offer insights on how to navigate today’s environment.

What is your top advice for founders raising a Series A today?

First off, ignore advice from those who have only raised capital during the last decade. We are in a totally different environment now. 

When markets dip like we’re seeing now, some investors are more cautious and slower to deploy. When this happens, your story needs to be all the more compelling.

As you prepare to pitch, it’s no longer just about laying out your vision, with some slight hand-waving about how you’ll get there. If your company needs to raise in the next 12 months, you should have clarity on the following three points: 

Your unique insight

The founders that can raise Series A will be those who are good storytellers. This truth never changes, regardless of the funding environment. Elon Musk raised money when Ford was about to go bankrupt and the government had to bail out GM. Your passion, tenacity, and unique insight for building this business is still the number one factor in raising Series A. 

Why now

There is no shortage of disruptive companies with breakthrough tech. Why is yours uniquely situated for this moment? In an economy where there will be pressure on buyers’ budgets, why is your solution a must-buy? 

Future funding path

Part of what early-stage investors are evaluating is your ability to raise in the future. That comes down to your salesmanship and your intelligence around growing a business at venture scale. When pitching for Series A, if you are also able to point to what milestones you’ll be targeting for Series B, investors will see longer-term viability in you and your company. Be prepared to speak to a scenario like this: After this reset, the bar is back to the norm that we saw during 2003 to 2013. If you have $10M in the bank, what can you achieve? Can you get to $10M+ revenue with attractive unit economics so that you can raise B? 

Do you predict that Series A investment amounts will change in the next year?

It might sound contrarian based on what you’re seeing on Twitter, but my hunch is that the amount of capital LPs will invest in GPs and the size of Series A funds won’t change very much. Professional investors understand that the best companies are built after a market correction. Those are often the best vintages. There may be a pause, as everyone is watching and waiting for the bottom. Here at Canvas, our pace is consistent amid highs and lows, as that’s core to our strategy. But looking across the landscape, I suspect the activity in 2022 will go at a snail’s pace and pick back up in 2023. Q1 2022 was still very healthy but the market dramatically changed in the last three weeks in May. 

We will see a meaningful slow down across the board this year, as LPs ask GPs to stretch out investment periods to 2.5 years. Everyone will be eager to fund Series A in 2023, but likely at a lower amount and lower valuation than what we have seen in the last two years.

This was the reality from 2003-2012 and many great businesses were started during that 10-year period. Remember Airbnb, Twillio, Block, Stemcentrx, GitHub, Zscaler, Okta, WhatsApp, and many others all started in 2008 and 2009, right after the global financial crisis. And SpaceX, LinkedIn, Qualtrics, Five9, Mailchimp, Proofpoint, Infor, and Blue Buffalo started in 2001 and 2002, right after the dot com crash. History reminds us that the best companies often get started after a correction.

The opportunity to build iconic companies hasn't changed.

What are some best practices to keep in mind when preparing for a Series A fundraise in any market?

Your Series A fundraise is about selling a promise. Being a good storyteller is at least 85 percent of the whole exercise. Don’t underestimate the importance of being able to say what your company does in one crisp line. Your goal will be to articulate the company's vision or mission to which people become emotionally attached. Paint a future that is so different, people want to see it happen and can't wait to help bring it to life.  

Throughout, you must find and use your own authentic voice. Tell the story of what motivates you. What unique insight do you bring that will allow your company to thrive, to bring something new to the world? You'll find that most Series A investors are dreamers, and want to dream with you. In Series A, investors are betting on you, the entrepreneur, more so than the company, because the company is still taking shape.

When is the right time to raise a Series A? 

If you have enough cash to hold off fundraising this year, I would. If you don’t have product market fit yet, I would also hold. And bear in mind that if you’re holding, you should still be cultivating relationships by keeping folks updated and generating excitement. Those relationships will give you the insight you need around getting the timing right. 

The best time to raise your Series A is when investors are ready to give you capital. Outside of the current environment, you generally want to raise capital when you don't need capital. But you also need to understand your runway. Go at it from a tactical perspective. Force yourself to look at what you will need to go pitch investors. Is it new data? A better story? In my experience, so much of it is when you feel emotionally ready to go, and are confident in what you've developed. 

Deck vs Memo? 

Both. Some investors like decks, some like memos, so prepare for each preference. My advice? Have three documents: a short deck, a presentation deck, and a due diligence deck/memo. The short deck should include top highlights for people to forward and share. The presentation deck includes the details that will wow investors. 

How many pitches should I prepare for?

As you get ready to pitch Series A, mentally prepare to pitch 60 shops - and to do it all at once. It is a mathematical game. Say you get 60 introductions. Most likely, 21 will never respond to the intro. Another 20 of them will take a meeting and then ghost you. The last 20 will take the time to meet, dig in, but will work at different paces. By having these conversations all at once, you create tension and excitement. The tension of the process dictates the valuation you will get, which is a subtle, but important, piece of all of this. When you have competition, the price moves up. When you have no competition, no matter how much people love you, the price is lower. If you are serious about raising, pause your focus on operating your company and commit to fundraising. Expecting to meet with at least 60 shops to get 3-5 term sheets at the end is what I recommend. Even if you end with just one term sheet, that’s still success in my book.

Warm intro or cold outreach?

Both. I have seen cold emails and DMs work. Going through the associate and senior associate ranks can actually work to your favor, and is often underutilized. We are in a new era, where the investing staff is hungry to differentiate themselves at their own firms. They will advocate on your behalf. A warm intro to them also works. Especially from a portfolio CEO of theirs, that's the number one validation. 

To learn more insights on fundraising and what it takes to really grow an early-stage company, subscribe to our newsletter and follow me on LinkedIn.

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