Field Guide

Field Guide

The Modern GTM

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Part I. How to raise Seed and Series A capital

TLDR: Top takeaways for raising a Seed or Series A round

In the early years of an enterprise software startup, there are three distinct phases for founders to navigate:


• The Idea Phase: A founder seriously contemplates taking the leap to start their company. Milestones: recruiting a co-founder; creating a detailed description of the product; and talking with customer prospect types to confirm there is a true market pain and now is the time to solve it.

• The Seed Phase: The primary goal is to find and demonstrate product-market fit. Milestones: hiring a core team; delivering 1.0 of the product; reaching a traction level where the business has 10+ customers and $1M of ARR.

• The Series A Phase: When a startup scales its go-to-market efforts to accelerate revenue based on demonstrated product-market fit. Milestones: developing the sales and marketing team; building 2.0 of the product based on vision and market feedback; and reaching 50 customers and ~$10M of ARR.

Startups do NOT increase in value in a linear function, but rather as a “step” function.


The valuation of a private startup is imprecise, and only significant changes occur at the time of financing events.

The “steps” in valuation for a startup are tied directly to the company achieving critical milestones and investor perception that the overall likelihood of success for the business is increasing. (Said differently, valuation is inversely correlated with risk).

Reduction in risk at each phase is tied directly to the startup accomplishing the necessary milestones for that particular segment of its lifecycle.

Introduction to raising Seed & Series A venture capital

As a founder, you’ve embraced the life-changing decision to set out and tackle the difficult obstacles on the way to building a valuable, enduring company. At Unusual, we decode the lessons of the masters and make them available to tomorrow’s founders to increase their likelihood of success. 

This Field Guide module is tailored to founders of early-stage enterprise software companies and organized into two basic parts:

Part I. Milestones & valuations for Seed & Series A

Early-stage milestones for enterprise software companies


As an entrepreneur, thinking about all that needs to happen to succeed can be overwhelming. Many successful founders joke, “If I knew how hard starting a company would be, I’m not sure I would have taken the leap!” At Unusual Ventures, through our time spent with hundreds of successful entrepreneurs, we’ve learned that the vast majority break the larger journey into smaller, more manageable phases — each with specific goals. It may be a management secret, or possibly just a coping mechanism, but either way, chunking works. Conveniently, the phases are typically bookended by fundraising events. This is the simple formula:

Company raises money → Company delivers A, B, & C → Company raises more money → 

In the early years of a startup, we believe there are three distinct phases for founders to successfully navigate:

  • The Idea Phase
  • The Seed Phase
  • The Series A Phase

Each phase has distinct goals along three dimensions: team, product, and traction. 

1. The Idea Phase for enterprise software startups

This is the period when a founder is seriously contemplating taking the leap to start a new company.

The milestones in this phase are consistently: 

A. Team: recruiting a co-founder 

B. Product: creating a detailed description of the solution to build

C. Traction: talking with enough customer prospect types to confirm the “founding insight” — that there is a true market pain and now is the time to solve it

Oftentimes founders quit their current job to focus on accomplishing these milestones, but that's not always the case. It's true that sometimes founders do A, B, and C before quitting their job and/or incorporating their company. Both can work. The key point: Order of operations is not critical during the Idea Phase!

If these milestones are achieved, and the business is a fit for venture capital, it is at this point that the company would seek to raise Seed capital.

What is a founding insight?


A founding insight is the bedrock intuition that you are building your company on. Ideally, you’ve had first-hand experience living the pain that drives your belief that now is the time to build a new solution. Critically important in the Idea Phase is validating this belief through at least 20–30 customer prospect conversations. (See more specific tactics in our Customer validation outreach playbook). 

2. The Seed Phase for enterprise software startups

Note: We interchange “Seed” and “Pre-Seed” to mean the first invested capital in a startup. Raising seed investment is for idea stage companies that are pre–product market fit.

As Benchmark Capital Founder and Stanford Business School Professor Andy Rachleff teaches in our Unusual Academy, achieving product-market fit (PMF) means that a startup has proven it understands which features to build, for a specific audience that cares desperately, with a business model that drives customer purchases. The primary goal of the Seed Phase is to find and demonstrate product-market fit.

“Achieving product-market fit means that a startup has proven it understands which features to build, for a specific audience that cares desperately, with a business model that drives customer purchases. The primary goal of the Seed Phase is to find and demonstrate product-market fit.”

The milestones to accomplish in the Seed Phase:

A. Team: hiring the core team

B. Product: delivering 1.0 of the product

C. Traction: reaching a traction level where the business has 10+ customers and $1M of ARR 

Ten-plus customers and $1M of ARR are not exact figures, but approximately what Series A investors look for in 2020, when we published this module. Note that traction is not 10 customers or $1M. Typically, you’re not looking for a single large elephant or two. Having a mix of a few six-figure customers and small-mid size customers in the $50K ARR range demonstrates repeatability and flexibility of your early go-to-market strategy. 

If these milestones are achieved, it is at this point that the company would seek to raise Series A capital.

3. The Series A Phase for enterprise software startups

This is the period when the startup scales its go-to-market efforts to accelerate revenue based on demonstrated product-market fit.

The milestones to accomplish in the period after raising a Series A: 

A. Team: primarily increasing sales and marketing headcount

B. Product: building 2.0 of the product based on vision and market feedback, while removing early technical debt

C. Traction: reaching 50 customers and ~$10M of ARR

 

Valuations and the startup step function

Startup valuations increase as a step function.

For private companies, valuation increases occur at the time of fundraising. It’s essential that founders understand these facts

How do valuations increase for private companies?

  • Startups do NOT increase in value in a linear function, but rather as a “step” function. 
  • The valuation of a private startup is imprecise, and only significant changes occur at the time of financing events.
  • A new stock price is assigned at the time of each financing based on the agreed upon valuation of the company.
     
  • The “steps” in valuation for a startup are tied directly to the company achieving critical milestones and investor perception that the overall likelihood of success for the business is increasing. (Said differently, valuation is inversely correlated with risk).
  • Reduction in risk at each phase is tied directly to the startup accomplishing the necessary milestones for that particular segment of its lifecycle.

Understanding that startups increase in value once key milestones are achieved enables founders to focus on creating a specific set of goals at each stage of the company’s journey. This way of thinking is one of the foundational pillars of the Unusual Method

Founders should appreciate that there is no “partial credit” in the startup journey. Achieve the milestones and de-risk the business such that more capital can be raised — or fail. Or, as we like to say at Unusual:

“Getting 80% of the way to the moon doesn’t count for anything.”

— Team Unusual Ventures

For Seed and Series A enterprise companies, the good news for founders is that the line for what milestones need to be achieved at each stage is clear.

Once the right goals have been set, what’s left is the fundraising process itself. This process can be broken down into five basic questions: 

  1. How do you approach investors? 
  2. What goes into a great pitch? 
  3. How do you manage a fundraising process? 
  4. What terms should you pay most attention to? 
  5. How do you ultimately make the right decision?

Continue to Part 2: Pitch and process.

Written by
John Vrionis
Co-Founder & Managing Partner
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John Vrionis
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Pitch and process

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