How To Approach Series A In A COVID-19 World

Future profitability is the promise every growing startup founder clings to, but investors aren’t so easily swayed these days. In this time of economic uncertainty, funds will be awarded to only the most recession-resilient young companies.

Most investors (68%) believe that the COVID-19 pandemic will have at least a somewhat negative impact on early-stage investment activity in 2020, according to a survey from 500 Startups, a leading global venture fund and seed accelerator. However, most firms are still investing, especially in industries such as healthcare, logistics, and remote work solutions.

Even before the coronavirus crisis racked the global economy, investors were becoming more cautious about funding. In February, direct-to-consumer mattress firm Casper became the latest high-growth startup to price an initial public offering well below initial expectations, following high-profile flops from the likes of Uber, Lyft, and—perhaps most infamously—WeWork (which didn’t even make it to an IPO).

As investors push back against the growth-at-all-costs model that’s been a Silicon Valley staple, more entrepreneurs will be forced to rethink their business plans and investor pitches. Early-stage startup founders will no longer be able to sell the hope of someday profits in exchange for huge sums of cash. Even relatively risk-tolerant venture capital firms will want to see proof of profitability now rather than wait until some distant, uncertain future.

Show Me the Money

Investors at Green Cow Venture Capital, an early-stage venture fund, have always evaluated startups on the basis of their abilities to thrive in an economic downturn. Strong fundamentals, profitability goals, stable cash flows, and a solid business model are indicators that a company can weather a recession—which makes them strong candidates for funding.

“Don’t panic,” advises Maggie Sprenger, Green Cow’s co-founder and managing director. “As much as the transition into a different economic cycle can feel unnerving, there are a lot of opportunities in a recession. And that said, don’t be complacent, either. There are always unintended consequences, and we are at the beginning of understanding the impact of COVID-19.”

To prepare for a Series A funding round in today’s investing environment, founders will need to have more than a well-rehearsed elevator pitch; they’ll need a comprehensive business plan and the foundations of a sustainable company. In other words, they’ll need to start managing their companies as monetizable businesses—not projects with potential.

Unlike a seed round, which is mostly based on founder experience and selling investors on the company story, a Series A typically requires you to provide metrics as evidence of early product-market fit. Without an established user base and an identified source of ongoing revenue, these metrics will be hard to come by. That may be why fewer than half of companies with seed funding will raise Series A funds, according to Investopedia.

Your young company doesn’t have to be running like a well-oiled machine for you to feel confident in securing Series A funding, but you should be making consistent, planned progress toward profitability. As you prepare to (virtually) meet with investors, here are three steps you should take to ensure they’re impressed by your pitch.

1. Identify your sales strategy.

You’ll need to show investors the components of your sales plan: how you will sell your products, the team you’ll need to hire, the pitch you’ll make to customers, the channels you’ll use to market, and so on. They want to know exactly where your revenue will be coming from once you have funding. Otherwise, the funds are bound to run out, and they’ll have nothing to show for it.

Paint a detailed picture of your vision for the funded business. “You have to convince the investors that the money they put in will create all of this, that you have a solid plan and you have identified what you will do with the money you raise,” says Jeff Erwin, who’s been a startup founder and CEO in the tech industry for more than 30 years. The best way to show them that you can sell successfully on a large scale is to have done so already on a small scale. Proof points include pilot customers, strategic partnership lineups, or early press you’ve received.

2. Articulate your business projections.

An interesting product is often enough to get you noticed during seed rounds, but securing Series A funding requires a concrete business plan. This includes identifying customer profiles, your total addressable market, and future financial projections. You need more than passion at this stage.

In a seed round, you may be able to raise money by wowing investors with a vision of what’s possible. In a Series A, you’ll need to show them both what’s possible and what’s realistic. They’ll want to know what a reasonable growth trajectory could be. Sure, they’re interested in hearing about all the money they could make, but primarily they want to see that you understand the financials and key metrics of your business. Additionally, it’s helpful to show an understanding of potential legal, regulatory, or other risks to the business and how you might mitigate those. VCs want to know you’re ready to captain the ship.

3. Plan your investors’ exit strategy.

The reasoning behind all of this is that, ultimately, investors want to make money. Whether you hope to eventually IPO, get acquired by a larger company, or merge with a competitor, Series A investors will want you to show them a plan for their exit strategy. Keep in mind that the goal here isn’t to guarantee a certain exit, but rather to prove that you will find a way to deliver a return on their investment.

Your investors could likely make money in a number of ways once you’ve reached your profit objective, but if you hope to get funding, don’t tell venture investors that you intend to keep your company private. Likewise, don’t go into a Series A meeting with the outlandish idea that an IPO is imminent. Have a realistic plan in place that shows them the payoff they can expect to receive in return for giving you money.

The days when investors would willingly wait for years for a tech startup to become profitable are in the past. For every Tesla that churns through cash yet continually rewards investors, there’s a WeWork that just churns through cash, and that’s not sustainable during a recession. The environment for entrepreneurs is far different today from a decade ago—or even a couple of months ago. If you’re an early-stage founder, focus on profitability and see the money come to you.

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Forbes – Entrepreneurs

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