Back in October 2012 I wrote a guest post on TechCrunch about How To Raise A Seed Round.
This post is a follow up, dedicated to sharing what I learned as we raised our $6.5m Series A from Kleiner Perkins.
Our A round closed on February 14th, 2014. Sealing the deal on Valentine’s Day was quite the reminder that we were jumping into a serious, long-term relationship here.
It was one of the best days of my life. The wires came through in the morning with no hiccups. The incredible Zumper team, after a year and a half of hard work, were over the moon. I made a rare exit from the office at 4pm for what turned out to be a surprise Valentine’s Day trip to Tahoe, which my fiancee had organized. Every late night, every early morning, every rejection, every sales call, every line of code, had led to this day.
We were painfully aware that we were supposedly in the midst of a Series A Crunch when we had gone out to fundraise. It was daunting.
Here’s what I learned along the way.
1. There is no Series A Crunch.
At least not in the numerator of many commentators’ calculations.
Much of the ink spilled about the Series A Crunch points to the fact that a lower % of seed deals are getting through to Series A financing. That is true. But it’s logical fallacy to conclude that this means it’s a ‘Series A Crunch’, which to me implies a significantly lower volume of Series As getting done, which is not true.
An alternative conclusion from the decreased % might be that too many companies were being funded at the seed level that perhaps shouldn’t have been. The denominator might be bloated.
A glance back at the numerator – the number of Series A deals completed each year – shows that this number has actually been more stable. Sure, it’s more competitive out there than ever, but top companies that are growing are still getting funded. You can do this. Focus on your company’s growth, not on the noise. If you’re attending tech panels listening to experts telling you that there’s a Series A Crunch, you’re not doing this right. You should be with your team building.
2. Unless you’re very lucky, you need to be patient. This takes time.
Don’t expect to raise your seed round, publicly launch, and then raise a snap Series A off the back of a couple of months’ traction. Secret is a recent exception to that, but it’s very rare.
Zumper launched on stage at TechCrunch Disrupt in September 2012 and made it to the finals of the Battlefield pitch competition. We had a stellar first four weeks of conversion data. We felt good.
We were approached by several VCs – some from within our seed round, some from outside – about whether we were looking to raise again. It was tempting but ultimately distracting. Neither side was really ready to do this, and our numbers were definitely not ‘there’ (more on what ‘there’ means later).
The next time we raised capital, in the Spring of 2013, it was a seed extension of an additional $700k in convertible debt. Not a Series A. There was no shame in this. Dozens of companies are doing this right now. As we too discovered, a $1 million seed round did not buy us enough run rate to get us to the Series A. So we bought ourselves more time.
3. Raise on Momentum.
Back to what getting your numbers ‘there’ means.
I once had coffee with Jason Freedman of 42 Floors to compare notes, since we are attacking parallel verticals within real estate. Jason’s startup has raised a bunch of money, quickly.
One thing Jason mentioned to me was the importance of momentum in fundraising. I totally agree with this.
When we ultimately went out to raise our Series A at the end of 2013, we focused heavily on our traction over the past few weeks, across both our Consumer and Professional products. Not only did we have double digit month on month growth for the past year, but we had double digit week on week growth for the two months running up to our pitches. That helped immensely.
4. Drill home a one-line reason to do your deal.
VCs won’t remember your pitch deck. They might barely remember the product features you demo.
So it is important to leave VCs with one killer stat or point of validation that will burn bright in their brain. Most likely it will be related to momentum. Quite possibly it could be related to Letters of Intent to buy you or other VC offers.
Ultimately, ask yourself this – “If the Partner who wants to do my deal writes a one line email to recap my pitch to a colleague who wasn’t present, what will she say? What’s the one killer line that she will use as her hook to get this deal done?”. That’s what you should hammer home in your pitch. Start with it. End with it. Dine out on it.
5. Always be talking.
As I mentioned in the final point of my Seed Round article, keep working your audience. especially if you’re CEO. Your primary job is to keep the lights on.
I still send monthly email updates. I still attend portfolio events. I offer my VCs great dealflow from awesome friends raising money.
Stay in your existing or potential investors’ heads. By the time you go into that Series A Partner meeting, you don’t want to be greeted with ‘hey, how’s the past year been?’. You want to be greeted with ‘oh, and here’s the CEO, we’ve been talking for the past few months and we both felt it’s the right time to get the deal done’.
That’s how I did it with Chi-Hua, Randy and Kleiner Perkins. It was quick and it felt right.
6. If you’re reading this pre-Seed round, choose your first investors very wisely. The ‘Signalling’ effect is real.
We raised a ‘party round’ at the seed stage, with 7 well-known funds investing.
We were approached by other investors outside the round literally dozens of times in the 16 months between launch and Series A. But, if you’ve raised your seed round from at least one well-known VC, every other conversation you have will end with ‘Why aren’t your existing guys in?’. Every VC who asked me that had been someone who had approached us cold, knowing we weren’t actively raising. And yet, despite the fact that we hadn’t even begun our process, this question always surfaced.
In retrospect I would go as far as to say that we had a sub-20% chance of getting a lead investor from outside our seed round, such was the power of the signalling effect. Luckily, we chose our seed investors carefully, and so we stuck our heads down, hit our growth, and then went back to them. It was therefore not surprising that it was two other seed investors, NEA and Dawn Capital, who joined in on our Series A that Kleiner ultimately led.
And so here’s my advice about how to plan for your future Series A if you’re raising your seed round now.
First and foremost, get it done. The seed market is contracting a little, and capital is capital. Lock it down.
But if you are intent on raising from branded VCs, raise from several. Raise from as many as humanly possible. Dilute the signalling effect by giving yourself at least half a dozen Series A options down the road. It is very, very risky to raise from just one VC, especially if they are well known for doing Series A investments. If they don’t invest again, you’re in trouble.
And if you don’t go down the ‘party round’ route, raise from angels. VCs know that the vast majority of angels have no ambition to lead Series As, and angels themselves can often make those VC intros for you later on. So it can be a win-win.
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Best of luck from everyone here at Zumper. We’re huge fans of entrepreneurs taking wild swings in archaic and undynamic industries. Any questions, I’m available on @anthemos.
As for Zumper, I have no idea what my follow up to this article will be in another year’s time. But our recent Series A has bought us valuable time to build our team and deliver the end-game product for the apartment rental industry that we haven’t publicly launched yet. It is a very good time to be at Zumper HQ right now.
Anth, Zumper CEO
p.s. We’re hiring! We’d love to hear from anyone interested in joining the team – especially iOS engineers, frontend web engineers and designers. Get in touch through AngelList or email jobs@zumper.com.
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