Secondary fundraising: the facts – moving from seed to Series A

With only 19% of seed companies going on to raise Series A, Jeevan Sunner of VC Playfair Capital shares her advice for taking your startup to the next level

The fact is that only 19 per cent of seed companies go on to successfully raise Series A secondary fundraising.

What’s the one factor that can significantly improve your chances by sending a positive signal to the market? That your original investors following on in subsequent rounds. It makes sense — one would assume that no savvy investor would throw good money after bad. Investors putting their money where their mouth is says, “We support you.” As a founder, convincing your current investors to reinvest through secondary fundraising could be make or break.

As a VC, “to follow-on or not to follow-on” is determined by a number of factors. If the VC holds a 10 per cent ownership stake at the seed stage, follow-on investments allow it to maintain that original investment and ownership stake going forward. Where portfolio companies are truly excelling, VCs may even want to increase their ownership.

>See also: 10 steps to securing investment for your business

However, there are some scenarios where your current VC reinvesting may not work, such as:

  • Where your round is too large, your investor may not have the funds to allocate
  • Where your round is too small, and you want to open the round to new investors without current investors taking up allocation
  • Where your EIS investor hits the maximum allocation in a tax year

But sometimes, despite earmarking funds to follow in future rounds, investors choose not to. They may have lost faith in your ability to build a unicorn or believe you’re overvalued at £20m compared to the £2m valuation they paid last year.

 This is something you want to avoid.

4 ways to encourage secondary fundraising

Here are four key considerations when convincing your current investors to reinvest.

#1 – In some ways, it’s not that different to wooing new investors…

You still need to convince people to part with their money. Sell the dream and vision of the founding team, and then show that you have started to make the dream a reality. Explain what you’ve learned in the process to date, particularly the downs that they will have experienced with you. Highlight your sustainable competitive advantage over new entrants that have popped up since your last fundraise. Remember, the market trends and drivers will be different from what they were 18 months ago so answer the all-important “Why now?” And ideally show that the market has continued to expand, and the problem has only intensified.

As you would with a new investor, position your startup in the best light. Often funds will require you to go through the IC process, even if it’s a tamer version; they might even write a new investment memo. Take the process as seriously as your VC takes it and don’t be tempted to shortcut.

#2 – Critically evaluate yourself against expectations set at the beginning of your journey together

Chances are that you and your investors will have discussed the following strategic goalposts during the original fundraise:

  1. Milestones to reach the next funding round
  2. Milestones to achieve a “large” outcome
  3. Cash runway

When it comes to milestones to reach in a secondary fundraising round, consider whether you have achieved these and where you haven’t, be honest in answering why not. Pre-empt questioning from your VC by rationalising shortfalls. Whether it’s unexpected customer churn or delays in finding the right full-stack developer, your investor should understand and appreciate your ability to self-assess.

As for achieving a “large” outcome, evaluate whether you are still on track to achieve that goal or whether the goalpost has changed in the past 18 to 24 months. With more experience, you should have a better idea of potential exit opportunities; your VC will be interested to hear about that sudden increase of M&As in your sector.

And consider whether your cash runway was indeed 18 months as you originally forecast. If you burned through cash in a significantly shorter time period (>50 per cent), evaluate what happened. Your current investors will want to know that their cash was well spent and that you have a sustainable business model, before committing to invest further.

It’s also likely that during your time working together, you and your investor have discussed key business risks. Pre-empt those concerns from creeping into discussions by considering how you would mitigate against these risks in the future.

>See also: 6 questions you need to ask when investing in a start-up

#3 – Consider how the VC may be thinking about the Series A vs the seed round

Show your investors what you’ve achieved in terms of strategy and execution, product, R&D and pipeline since the previous fundraise. But avoid falling for the misconception that a Series A is a “larger” seed round. You’ve had more time and resources to finetune your product, test product-market fit and build a superstar team. As such, the expectations will be different; where five pilots previously were great, your VC will now want to hear all about conversion to paid contracts, feedback from customers and the reason for any churn. Whereas the seed stage is sentiment- and vision-driven, Series A is about metrics and whether you’ve achieved them or not.

#4 – Balance the timing of going ‘out’ to fundraise

Current investors will want to know they are reinvesting in a legitimate follow-on fundraise (£1m committed solely from current investors doesn’t count). VCs, particularly single-stage funds who do not have the resources or skillset to support in larger rounds, want to see you bringing in investors with the right expertise, new opportunities and networks.

If current investors reinvesting sends a strong signal to the market, you still want to go to your current investors first. Simultaneously, start to build momentum with new investors to show your commitment to a strong fundraise. This can be as simple as scheduling light-touch coffee catch-ups with new investors or creating an updated investor data room.

And if they still don’t reinvest?

Hopefully at this point, your VC is resolutely in your corner, passionate that you have what it takes to succeed, and is committed to supporting you on the next step of your journey.

If, however, you’re still struggling to convince your current VCs to reinvest, remember they still have the (equity) incentive to help you succeed. Ask for investor introductions and help with preparing for secondary fundraising. Plus, any feedback on why they could not invest can be recycled to help prepare for future investor meetings.

And a final point: maintaining strong relationships and information flow with your investors doesn’t start when you want to raise money; it should be an ongoing process with, at a minimum, quarterly or monthly updates to everybody on the cap table.

Jeevan Sunner is an associate VC investor at Playfair Capital

Further reading

6 mistakes to avoid once you’ve closed your first VC round




Jeevan Sunner

Jeevan Sunner is an associate VC investor at Playfair Capital.

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