Raising a seed round of funding is a milestone event for any start-up business and founders and employees will be rightly excited about the prospects for the future. Having raised seed money, the business is one step closer to becoming a success.

Although having every right to be excited, a founder should also be cautious and start planning early for the next steps in the journey. Research from CB Insights shows that in the US, fewer than 50 per cent of companies receiving seed capital go on to raise a further round of funding.

‘Only 19% of European companies that received a seed round went on to raise Series A’

Similarly, research by Dealroom on European VC funding during 2012-2018 demonstrates only 19 per cent of European companies which received a seed round went on to raise Series A funding in the following three years.

Bearing this in mind, what can an entrepreneur do to increase the chances of success?

>See also: Blossom Capital raises £65m Series A fund to invest in European tech startups

Here are 8 factors that will help your start-up get Series A funding:

#1 – Be able to demonstrate product market fit with meaningful traction

A business should be able to show clearly what the repeatable use cases are for its product. Traction and topline growth are key as without them, you have practically no chance to raise an A round of funding. For a business with revenues of £1m Annual Recurring Revenue (ARR), growth should be 150-200% or better. If the business is more advanced and making £3m ARR, growth should be 100 per cent or better.

#2 – Prove the business model and unit economics

A start-up business should be able to demonstrate the Return on Investment (ROI) a customer will achieve from using the product and show the profit (before sales costs) that each additional customer will contribute to the business.

#3 – Evidence of scalability

A start-up’s go-to-market strategy may still be evolving, but at least one channel should have enough evidence of scalability. The founder needs to understand the buyer journey and have a good grip on sale cycles, pipeline conversion rates and win rate against its competitors. If the business is not already tracking these measures by the time the seed round is raised, it’s important not to delay as a start-up will be expected to show historic metrics to the Series A prospective investors.

>See also: UK companies set for record year of venture capital investment

#4- Sufficient evidence of renewals and low churn

Churn is a real area of focus at the A and later rounds of funding. Ideally, net revenue churn should be positive but it is possible to get away with single-digit percentage gross annual churn. If churn is over 10 per cent, the business may have a problem. An investor will be looking at a cohort analysis, so a meaningful number of customers are needed to renew to provide the right level of confidence.

#5 – Recruit the best people

This is a core function of the quality of the company and its business idea, but also how well connected it is in the marketplace and the founder’s ability to lead a team. The culture of the business will have a big impact on recruitment and staff retention and investors will be looking at a variety of signals to confirm whether the start-up can attract the right talent.

#6 – Working with Series A VCs

Having dealt with the above, success can only be achieved once a firm starts thinking about its next funding round and begins to cultivate the right relationships with Series A VCs. Ideally, this means starting to talk to VCs at least nine months before the need to close the round; preferably 12 months before. The chances of success are increased if time is allowed for the VCs to get to know the business and follow its progress, allowing it to build its credibility and the investor to build their confidence in the business. Seed investors, whether Seed stage VC funds or angels, should be able to introduce the business to the right Series A investors ensuring portfolio fit as well as a cultural fit. It is crucial to seek a personal introduction to stand out from the hundreds of other companies knocking on the VC’s door.

#7 – Choosing the right VC for the business

It is important to optimise for investor fit rather than for valuation at the Series A fundraising stage. Of course, valuation is important but providing as it is within reasonable parameters, it should not be the key factor in the selection process.

1. VCs investing predominantly in later-stage companies will put an increasing focus on financial structuring at the expense of business-building expertise. If a business is raising Series A funding, it is likely it still needs a lot of help from investors on building the business, so VCs who mainly focus on A rounds and late seed are better placed to contribute. This could be in the form of direct advice or by introducing a firm to trusted and proven advisers who can work with it. One of the most valuable resources is access to other portfolio companies and entrepreneurs, many of whom have tackled the same issues as the start-up is facing.
2. It is important to establish the significance of the deal to the fund. If the fund’s usual cheque size is £10-30m, a £3m investment will not get much of its time. As a result, its initial interest may wane as soon as the next exciting deal comes along. It’s vital to ask whether the VC will help a firm if things go off plan, or will it abandon the start up? The accepted wisdom in VC investment is that the majority of investments will fail and the VC should focus on the successful ones. However, the successful companies usually don’t need the VC’s assistance — it is those that have hit a rough patch that need help.
3. Last but not least, establish if, as a founder, you can work with the VC on a personal level. If embarking on a five or seven-year journey, this is really important to get right. To figure this out, a founder should spend some time with potential investors, engage early and have regular check-ins.

#8 – How much money to raise and at what stage?

The temptation and the accepted wisdom for a start-up is to raise just enough to last another 18 months, so as to minimise dilution. However, if the founder can raise additional funding and extend the runway by six months or so, he or she should do so. This will provide more breathing space and time to act to correct any metrics which are not on the right trend line, as growth trends are rarely on an unbroken upward trajectory. It will also allow the founder to focus on the business before fundraising starts again for the next phase of growth.

Emil Gigov is a partner at specialist tech venture capitalist AlbionVC

Further reading on venture capital

How to pitch to a venture capitalist – a Growth Business guide