Startups Scaling Smarter From Seed to Series Funding

Introduction

Seed funding has seen exponential growth in recent years. According to CrunchBase, the number of seed-funded companies in the U.S. alone grew 30% from 2016 to 2020 compared to the previous five years. Following seed funding, about one in three startups will successfully tap venture capital (VC) firms for series funding.

But with the rise in seed funding and series funding comes more hurdles for startups. Now, not only do they need to stand out from competitors to gain customers, but startups face more competition from other companies vying for investments and higher expectations from investors just to stand out from the crowd.

A conversation with Olivia O'Sullivan

Olivia O’Sullivan, partner and Head of Platform at Forum Ventures, certainly knows a thing or two about the scaling and fundraising process for startups. Forum Ventures, celebrating its 10th anniversary this year, is a funding platform that supports B2B SaaS founders in their growth journeys. During her time at Forum Ventures, O’Sullivan has witnessed many challenges — and successes — as startup founders seek funding from VCs. 

With her expertise, O’Sullivan has helped support hundreds of companies in their growth. Fortunately, she is sharing that knowledge with HubSpot for Startups to help even more founders on their path to success.

Standing out to investors

HSFS: What are some things you’ve noticed that startup founders are doing to stand out to investors?

Olivia O’Sullivan: I think the truth of the current environment is that both the startup and VC landscape is going through a really massive reset, and so I think what's important to recognize is that founders still do face a tougher road ahead. There are a few implications that we're seeing across that. We’re seeing companies will likely fold at a higher rate than we have experienced over the last decade, and many of these companies will be valued at more than a billion dollars. So for these unicorn companies, it's going to continue to be hard and harder than it has been historically to raise capital. 

We believe great entrepreneurs and great startups will continue to find capital, but marginal businesses or people who maybe have not truly identified a sort of pain point or wedge will go away. And we're seeing more of this emphasis around profitability and capital efficiency, instead of just hyper growth . 

What is especially important for founders and what we've seen, is not just being a great team, but emphasizing why there is really strong founder-market fit or why your team has a unique insight into the space that others don't. 

So I think both in how founders are framing their background and experience in a pitch deck, but also in the way they're positioning that founding team in an email to an investor. Really spending time on your own lived experience, why you're the correct team to be solving this problem, why you either have an insight or experience that other people don't have really builds credibility and conviction to take a call, especially at the early stages. So much of venture is a bet on the people, and that this is going to be kind of a big and growing market opportunity.

Once you're starting to have meetings, we are seeing folks spend a lot more time diving into the customer validation that you have done: what type of discovery have you have you had? What kind of insights have you pulled out from this? Do you really understand what the pain point is?

We've seen founders put together some really nice slides that kind of articulate at a 10,000-foot-view what they've learned from these conversations. But as they're digging in, maybe you have a partner call or you're moving down funnel with an investor, founders are also adding into their data room, it’s like you’ve double-clicked on that. So you might still have that 10,000-foot-view synthesis that's really highlighting, “Okay, you know, here are the themes that we have heard from our initial customer discovery, and maybe even our early pilot customers.” 

But now, allowing the investors to go a little bit deeper, whether that's giving links to call transcripts or call recordings or actually pulling out, “We talked to x person, this title at this company. Here were the themes that we've heard from them.” You're giving the investor an opportunity to really be able to see the rigor of discovery that you have performed, but also, you're allowing people to double-click. You've got the 10,000-foot-view that piques someone's interest in this person, you know, this person has done really thorough customer discovery, and it's articulated in a way that I can understand and if I want to dive deeper, oftentimes we're seeing this in a data room. It wouldn't be something we're necessarily sharing in that first meeting, but an opportunity for investors to be able to double-click.

The third thing I will say is that so much of fundraising is about building momentum. On the positive side, there are many VCs who will be the first person to take a risk. They deeply believe in this space or you, and they'll be willing to write a check and set terms without other people participating. 

But there are a lot of funds that want to wait and see what's happening or if other investors are interested. Ultimately the investor is trying to underwrite risk, and they want to wait as long as possible to be able to make a decision until they can have as much information and as many data points as possible. What we're seeing to be really effective with our portfolio companies, and what we encourage folks to do while they're fundraising, is any investor who tells you, “We might be interested, we'd love to see how things shake out, and how conversations are going. Keep us updated,” or even people say, “Oh, things are a little bit early,” and maybe they have a few traction milestones that they're calling out that they'd like to see, those are all new people that you should put in a nurture bucket in your kind of investors CRM. All the people who say, “We don't like this space,” or “We think that this is not a good problem,” those are people you're not going to engage with, because they’re not going to be a fit for you. 

Anytime something big happens, something momentous, like you close a new customer or someone committed new capital, you're going to send an email update to that whole list of people in the nurture bucket that's like, “Hey, I'm super excited to share some amazing progress that we've had over the last couple of weeks at X company. We just closed XYZ customer, we're now up to x ARR, and we also are down funnel on a number of similar conversations.” And you can then say as your CTA, “We're still actively fundraising, so if you want to reconnect and learn a little bit more about all the progress over the last couple of weeks, my calendar link is here.” 

What we've seen time and time again is people will opt back into your fundraising process who previously were kind of waffling, because you’re building their sense of momentum.

The importance of personal branding

HSFS: How does a personal brand, such as being active on LinkedIn or involved in the startup community, impact the view of founders during the investment process?

O’Sullivan: I would say it is not 100% necessary, but I would really encourage every founder to spend time thinking about their own personal brand. I think, both from an investor standpoint, but also a customer standpoint, people are investing in a business because of people. People are buying from startups because of people in the early days, and so much of your company's brand at the beginning is your own personal brand as the founder and that founding story.

For example, we've invested in a company recently where the founder had spent the last decade working in construction, and he is selling to construction companies, but those people are not spending a ton of time on LinkedIn. And so he's actually spending a lot of time in these different environments and different events where he knows that audience is going to be, but he also spends a lot of time posting on LinkedIn about what he sees as big trends in the construction industry, what he's building in the space and kind of his experience with being an early-stage founder, and now, a venture-backed founder. That public persona, I think, builds great credibility.

It allows people to get a snapshot of how you think about things and articulate yourself. It establishes a sense of credibility, and I think it allows investors to find you. If you're an investor, your job is to know who the thought leaders in the industry are that we care about and who the companies are that we should have our eye on are. 

So I'd say that public presence, whether it's on LinkedIn, or maybe you have a blog, or maybe you start a podcast, or it could be something really small, but that kind of consistent momentum enables other investors to be able to just find you and feel like, “Oh, this person has a really interesting perspective.” As you’re down funnel and in conversations, investors are always going to double-click on who you are as a person.

Everyone compares it to a marriage — we're going to be together, if you're raising a seed round, for the next seven to ten years. So, obviously, you want to make sure that there's a lot of compatibility on that side. So people are going to look at your social profiles, people are going to ask for references, and want to talk to your customers. If you're already doing that, it puts you in an even stronger position.

The changing VC landscape

HSFS: The VC world is changing, where we see more investments in startups with some traction. How does that affect seed round allocation of funds and how founders use their funds?

O’Sullivan: Part of this is coming from implications at series A, that are now like trickling down into pre-seed and seed, kind of setting the stage in terms of the seed landscape. There is just less capital available at pre-seed, and the bar to raise each round is higher than it's been in a long time. 

One of the things that Carta, CrunchBase, and lots of others are publishing is that there's an assumption that many venture funds are not going to raise subsequent funds from LPs, and some have that estimate of upward to 50%, which is pretty wild. 

So there's definitely a contraction, broadly, and I would suggest taking a look at Carta, which publishes a ton of great stuff on fundraising activity. So you can see total rounds, raised total dollars, if people want to double-click on that.

If you're thinking about a seed round, and I would say everyone maybe has a different definition, let's say for purposes of this conversation, we're saying you're raising anywhere from $1.5M to $3M. What an investor is willing to see at that inflection point is, that you have a product that's live and you have demonstrated that your engineering team can build a product and iterate quickly. And you've demonstrated, in some capacity, the ability to be able to recruit a strong team, whether it's your co-founders, or maybe you have a few employees.

There is some sense of strong founder-led sales DNA; so much of selling your product in the early days is going to be you, as the founder, selling the product. I promise you that hiring a VP of Sales in the early days, before you have those first handful of customers, is going to be highly ineffective. And no one can sell this product better than you can as a founder, even if you don't have details, you have the most skin in the game and you are going to be the best one to sell that for sure.

Obviously, this is assuming there's a large and growing market, an investor needs to believe that there's the potential for your business to make $100M in revenue to have a meaningful exit. 

But from an attraction standpoint, after the pre-seed round, you want to prove that some subset of your customers are rabid users of your product, where you have rave reviews and there are signs of stickiness and strong engagement and some meaningful early traction. 

What does meaningful early traction mean? We're seeing right now a pretty big range in terms of revenue. There are still seed rounds that are getting done pre-revenue. I always tell people, though, assume that those people are the exception, not the rule, and you are the rule. But we're generally seeing anywhere from like $250K to $750k in ARR, is sort of what we're seeing in terms of seed rounds, and we're certainly seeing them get done with less, but that’s the general ballpark. And there is definitely a difference if you're selling into an SMB customer versus enterprise. 

But once you get that funding, you need to prove that your business is scalable with favorable unit economics and momentum. And the reason why that is, is because, in order to cross the crazy chasm—which is seed to series A—the bar is a lot higher. 

Before, if you were doing $1M in ARR, we saw that a lot of people were able to raise a seed round. But what we're seeing now is like $1.5 to $3M in ARR. So if you're saying you're raising a seed round with maybe $500K in ARR, you have to quadruple that in many instances to be able to get to that series A milestone. 

With the seed round, a lot of things are still kind of “squishy.” Investors want to see maybe some leading indicators about product and growth. But at series A, investors are going to want to see 80% to 150% net retention. They want to see a scalable revenue engine. How are you consistently closing customers? What are the channels that are driving leads and conversion? At the series A point, with those funds, they’re going to want to see you 3x  to 5x  the revenue in the next 18 months.

At the seed stage, instead of pouring a lot of money into hiring a ton of people, it's really about, how can you discover your growth engine? And then, how do you continue to refine those, so that you’re able to scale in a cost-effective way? 

Turn your fundraising into a sales process

HSFS: What are some of the biggest mistakes you see founders making with trying to secure seed rounds?

O’Sullivan: I think one of the biggest mistakes that I see people make is not running their fundraise like a sales process, or like a process in general. A lot of entrepreneurs will say, “Alright, we're kicking off our fundraise, we're just going to reach out to a bunch of people and try to meet a bunch of people at events, take a bunch of meetings, and mass email everyone and see what happens.” I think that so much of sales, and so much of success in fundraising, is running a really effective process. What I would advise every startup, especially at the seed stage, you really need to make sure that you're standing out and you're running a tight process. 

Spend some time crafting a really compelling pitch deck. If narrative and storytelling feel challenging for you, I think there are tons of great resources out there that founders can work with, such as a marketing agency or a pitch deck agency, that can help them clearly articulate what they're saying.

This is another mistake; a lot of founders put so much in their pitch deck that it isn’t digestible, there's no narrative there. An investor's eyes glaze over, people are only really looking at these at first glance with like 90 seconds. Your goal is to pique someone's interest to want to take a call with you. It’s the same thing with the email that you’re sending—how do you pique someone's interest to take that first call?

Spend time on that deck, and then start preparing the materials that you're going to need before even kicking off the process. You're starting to build out a target investor list. These are people that you think are highly relevant investors that are going to be a strong fit based on your stage or industry, maybe they have a podcast that talks about the space that you're building in.

Once you have all those foundational materials ready, then you're going to set up a CRM so that you can work through the stages and see where people are in that. Then you're going to take a two-pronged approach: you're going to figure out who in your network is connected to any of these people that you want to talk to; you're gonna send that intro request email that says something like, “Hey, I saw you are connected to X person, I wanted to know if you know her well enough to make an introduction as I'm kicking off my seed round and would love to share more about what we're building. If you do know her, I've included a forwardable below to make it really easy for you to facilitate that introduction.”

And then with that forwardable, this will be the same format that you'll send as a cold email, such as why this investor, one or two sentences as to why are you reaching out, and then you're going to include a one- to two-sentence overview of what it is you're doing without too much jargon. Then, add three to four bullet points that highlight some of the traction, or highlight, like, you've got an incredible strong team with 10 years of experience working in this space, you have 20K in MRR, whatever those things are, traction is great. 

Create a couple of bullet points that build that momentum. And then really, your ask is just, “I would love to tell you more about what we're building, let me know a few times that work.”

We're going to run this like a sales process. You want to see 25% to 30% of those first calls turning into second meetings and progressing down the funnel, but I think many founders make the mistake of not thinking about this like a fundraising or sales process and end up losing a lot of momentum.

Or, they're not sure—

•  “What did this person say?”
• “Did I email them once?” 
• Everything is kind of all over, everywhere, with 10,000 different spreadsheets.

The biggest piece of advice I would give is to take the time upfront to set yourself up for success. Think about what this process is going to look like. And make sure that you have all of those materials ready to go, and that you understand what this is going to look like because fundraising is really hard. We're seeing it take some people quite a few first meetings, sometimes over 100 first meetings, to get around that. The best that you can set yourself up for success at the beginning, I think makes all the difference, especially in this market. 

Investors will not always give the most candid feedback. In those instances, I would try, and people aren't always going to provide this feedback, but whether it’s on a call, in an email, just ask something such as:

“Hey, I really appreciate the time that you spent with me, and I understand that you weren't able to get conviction, but as an early-stage founder, I would appreciate any candid feedback that you'd be able to share with me. The good, the bad, and the ugly, I'm here to hear it to make my business better and hopefully will allow me to either improve my pitch or make decisions that will save me lots of time and mistakes.”

I think if you've come forth with that type of candor, you'll have some people who will follow up with more specific feedback that they probably wouldn't just give people otherwise. 

The other piece of advice that I'll give is to use every meeting as an opportunity to hopefully meet more people. If you have a conversation with someone where they're like, “I'm not sure about this space, I don't really like this business,” these are not people you're going to activate for this purpose, because they're probably not going to be interested in helping connect you with other folks. 

But let's say you have a conversation with someone, and they say, “I love what you're doing, you're just a little bit too early for us. We'd love to stay in touch, though, over the next couple of months, or maybe even participate in the next round. So let's definitely stay connected.”

A lot of founders in those situations are like, “Amazing, that sounds great. Let's do that.” I would push everyone to go a step further; how do you use that to get other investors? Founders could say:

“That makes sense. Who else do you think I should talk to? Do you have any other investors in your network that are maybe investing a little bit earlier that you feel like are right at my sweet spot that you would be open to introducing me to?”

You can make it really easy for the investor coming out of that call by sending an email that says something like:

“It was so great to talk to you. I really appreciate that you said you can connect me to X, Y, Z fund, here's a little forward or blurb, to make it really easy to send more information about me.”

We've seen founders who have taken those meetings, even raising maybe a pre-seed round, and they’ve taken a meeting with a seed investor, and the investor says, “It's too early, but we're going to introduce you to a bunch of other people.”

Use that to build other momentum and figure out, in every conversation, how do you either get candid feedback or how do you get another connection.

Final advice: be customer-focused

HSFS: Do you have any additional advice for startup founders looking to scale?

O’Sullivan: Lots of people celebrate how much money they've raised as like a star of their business. But really, what we're all trying to do is build products that solve real problems for our customers and drive great value and utility for the people who are using it. Venture is one avenue to be able to scale a business, and some people might need that to ignite the beginning, which I think is fantastic. 

But I'd say raising lots of money shouldn't be the goal. It should be, how are you building something that really solves the customer's problem? And I think if you are doing that in an industry that is big and growing, VCs will want to invest in that business, because you're so focused on the customer.

Conclusion

When it comes to fundraising, it’s all about planning, organizing, and taking advantage of momentum — without wasting too much time on something that may not be the right fit. With about two-thirds of startups that pursue series funding never making it past series A, going through series funding rounds isn’t always the best option for every startup trying to scale. 

However, for a better chance of success, startups can develop more meaningful connections with investors, prove traction and momentum to stand out from the competition, and ask for feedback even when meetings don’t lead to a “yes.” With these tips from O’Sullivan, startups can grow their network and get that much closer to a successful series funding round.