Market view and Insights
Investor expectations change with each fundraising round. Learn about later stages of startup funding from both founders and investors.
For startup founders, the fundraising never stops, but the journey changes. While early-stage fundraising is about getting investors to rally around a vision and a founder's potential, later-stage startup fundraising hones in on a company's growth status. Investors expect to see details about customer acquisition costs, retention rates and more.
Early-stage investing can be "a more casual process," while in later-stage financing "the stakes are higher," said Pal Erik Sjatil (Pål Erik Sjåtil), CEO and managing partner of Lightrock. "If you hit certain KPIs, you will attract a lot of investors. If you don't hit those KPIs, fundraising will get more difficult," he said.
Jerry Ting, co-founder and CEO of AI startup Evisort, which recently closed $35 million in series B funding led by General Atlantic, likened going from series A to series B to the difference between elementary and middle school.
"It was a really big shift for the team," Ting said, explaining how the investors wanted to see both financial metrics and early-stage excitement. "We had to be good at both and I think that's really hard," he said.
If early-stage investing requires a leap of faith, later-stage investors demand more clarity about the payoff and risks. With that comes more of a focus on metrics.
"At the beginning it was a slide deck and a story. What changes is that there is more money involved with every round, and because the company is growing, the plans become bigger," said Dominique Kronenberg, chief operating officer of Climeworks, a Swiss company focusing on carbon capture technology.
The type of metrics investors hone in on varies depending on the industry. But it generally involves metrics such as conversion rates, customer acquisition costs, retention costs, lifetime value of customers, and the like.
For many startup founders, especially those with less financial experience, it can be helpful to hire a part-time or fractional chief financial officer, said Nathan Beckord, founder and CEO of software developer Foundersuite, who has acted in such a role before.
One thing Ting did to prepare his startup for the series B fundraising was to dedicate one person on his board who used to be a growth stage investor to ask tough questions and get the team "self-auditing." Ting learned that there was a very specific "magic" equation that investors look for in the B2B SaaS space. The figure – which is derived from income minus expenses from sales or marketing divided by revenue – became key to their planning. Because Evisort went in knowing exactly how they'd be evaluated, they did all their workforce planning and compensation with the metric in mind.
Despite the rigorous preparation for these funding rounds, he was still surprised by the amount of detail investors went into, such as using the product themselves and calling customers to ask about their experience.
Every founder of a start-up has to bring a certain entrepreneurial spirit to be successful. The Princely House of Liechtenstein, the owner of LGT, has been successfully pursuing entrepreneurial activities for centuries. Entrepreneurial thinking and actions are deeply rooted in LGT's DNA.
To prepare founders for the transition, Charlie Graham-Brown, chief investment officer and partner at Seedstars in Geneva, said he strives to teach startups a growth mindset that can help put them on the path to continued growth and successful fundraising.
"There are always going to be hurdles to growth, and we just have to figure ways to overcome that and get back on to the growth path. . . there's definitely a process to it," he said. Seedstars teaches founders on that process, from identifying bottlenecks to experimenting with ways to find out what works and doesn't work," he explained.
Even though there is more emphasis on numbers in later-stage fundraising, Jason Yeh, a former venture capital investor and startup founder, said founders still need to pay attention to the story they tell investors.
In contrast to the seed round, later stage investors want to hear a story about "why we're growing and will grow into a gigantic company," Yeh said. They also want very specific details about how their investment will be used to fund growth. "It's a different kind of story from beginning days when about what could be," he said.
It's also helpful to keep in mind that some funds are more focused on metrics than others. For funds looking for returns within a few years, the metrics are critical. But for long-term investors such as Lightrock, Sjatil said that both are important.
"Numbers and story go hand in hand. Maybe some [investors] only focus on the numbers. We are very focused on the numbers and look for positive, measurable impact. But for us, only numbers won't make it and only a story won't make it. You need both," he said.
Developing rapport with investors is also crucial for a startup, said Maury Blackman, CEO of Premise Data which closed an $85 million series E in January this year. That was challenging last year with in-person meetings largely ruled out, but Blackman said he figured out a technique on Zoom. Instead of running through a detailed presentation, he would set up 20 minute calls with investors and no slide deck.
“It was just us over Zoom, one-on-one chit chatting. Here's a little bit about me, and let me learn a little bit about you. Here's just a quick sketch on the business. If this sounds interesting, then maybe we should schedule a more in-depth presentation,” he said. The 20 minute meetings helped screen through investors who were not interested and also helped establish rapport. “With that 15 to 20 minute conversation, you could really establish that connectivity with that individual,” he said.
As a startup progresses through later fundraising rounds, the founder will need to negotiate various terms such as adding on a board member or how much equity to sell.
Some investors prefer to be involved and want a board seat as part of the investment deal. While adding a late-stage investor to the board can bring a helpful perspective, a larger board can also create friction and be harder to manage. To prevent friction, it's important to determine that the investor is aligned with the company's vision. Blackman also emphasized that board members should add value to the business through industry experience, networking, or other ways.
Then there are things to consider, such as the company's valuation, how much of the business to sell, and details about the term sheet. All these factors can really matter, said Sjatil.
"If you speak to founders, they will say that this been a bit stressful. I worry a little bit of maybe not all founders are sufficiently sensitive to this," he said.
There are some guidelines – such as selling about 15% to 20% equity per round – but there can be a lot of variation. Here, an earlier investor can be an asset in setting up the terms for the following round of financing.
Part of Lightrock's value proposition, said Sjatil, is its ability to help founders prepare for the next round. If the firm comes in at series B, they're often the ones who help the company set the terms for series C. "Smart founders who have thought about the journey early on try to make sure that there is an investor who can help lead the following round," he said.
Fundraising is a process. Each round of funding is a stepping stone to the next round or stage of development. Depending on your industry, the time between each round can vary between six months to a year.
Investors have their own different set of criteria. In addition to honing your pitch, research the potential investor.
Fundraising is a long game. The best time to grow your network and meet investors is when you are not actively trying to raise capital.