Observations from raising a Series A in 2020

Two weeks ago, GRID announced a $12M Series A funding round led by NEA. I thought it might be interesting for fellow entrepreneurs to read a bit about our process and take-aways for fundraising in the — somewhat uncharted — post-Covid funding landscape.

For those of you that are not familiar with GRID, reading the backstory may be good for context.

To make a long story short from where that post leaves off, we raised a $1M Angel round about a month after the company was founded and a $3.5M Seed round 6 months later. We used that capital to build an exceptional team and get an early beta version of our product out just before the end of last year.

We came into 2020 full of confidence. Despite being pre-revenue, we had a best-in-class team, an 18-month runway, an offering with potential for product-led growth in an enormous market and compelling beta user data indicating that we might indeed have a winner on our hands.

Exactly the ingredients we believed we needed to raise a strong “conviction based” Series A round this year.

Conviction-based vs. traction-based funding

I think about VC investments as being broadly based on a spectrum between traction and conviction.

Traction-based funding is in most ways easier for a startup to land. The hard thing is to build the actual traction (kudos to all of you that have). But for the investors this is purely a metrics game. The standards we heard at the beginning of the year were pretty much the same as I’ve been hearing for the past 3–4 years: At $100k MRR (monthly recurring revenue) and 15% growth month-on-month you should have a pretty easy time securing a strong Series A. Obviously every investment is different and many are skeptical about such simplistic thresholds, but the benchmark is useful nevertheless. (To the benchmarks’ credit I’ve never heard of a company that met these criteria and DIDN’T get funding).

Conviction-based investing is much more of an art-form. It requires a deep understanding of the company’s market and planned business approach, a strong belief that the team behind the company can deliver on the vision and an imagination to understand how doing so can form a strong business.

Angel and Seed rounds are often largely, if not entirely, conviction based whereas Series A is probably the last round where conviction can play the leading role in an investment thesis — then usually backed with strong data, although maybe not the exact revenue and growth benchmarks mentioned above.

Setting up the funnel

Like so many other things in business (recruiting top talent, building partnerships and — well — sales), landing a round of funding is a sales process.

At the top of your funnel you have the leads — your potential investors. Over the course of the first 18 months of GRID’s operations, I had already touched base with about 50 VC funds. Most of them were inbound leads (funds that had noticed us and reached out to learn more), while others were existing connections through our board, shareholders, or my personal network. Some of those funds were already keeping a pretty close eye on what we were up to. Another 60 or so got on our radar through our fundraise process, so all in all we had around 110 funds in our “pipeline”, out of which we had one or more calls with about 70!

On the first call with a fund I usually try to better understand who they are and how they operate to get a sense of potential fit. My standard list of questions includes:

• What is your ideal funding stage to get involved (Seed, Series A, …)?
• What’s your typical ticket size (slang for how much money they typically put in when they first get involved)?
• What’s your investment focus (e.g. B2B SaaS, consumer internet, deep-tech, …)?
• In which geographies are your typical investments?
• Do you typically lead rounds, follow-on or are you open to both?
• How does your fund typically make investment decisions?

The answers to these questions help understand if the conversation is likely to go anywhere, even before you start talking about what you are doing as a company. That last question is particularly important, as it helps you understand the process ahead. Understanding who you’re talking to and what their roles are, when the fund’s decision makers (usually the partners) typically get involved — if they are not on the first call, which is rare — and who needs to be involved to decide on an investment.

The best funds can answer these questions easily, but the process varies a lot from one fund to another. Some of them are very structured in their approach, others more fluid.

In essence, what all of them are looking for is a reason to say “no”. I’ve sometimes joked that as a startup founder your job in the funding process is to eliminate investors’ reasons to say “no” so they end up with none and are forced to say “yes” :-).

Again, the best funds will clearly communicate if they are still interested, or if they’ve reached their “no”. My least favorite funds are the ones that draw out a long “maybe” through a lot of conversations with different people. A good way to gate this is that if there is not an obvious, strong interest after your first conversation with a partner at the firm, the conversation is not going anywhere.

The effects of Covid-19

I decided against using the C-word in the title of this post, but as you can imagine, Covid played a role in a funding process starting in Q2 2020!

We began testing the waters in February and March, honing the pitch and preparing our investment materials. I was all set to fly to San Francisco mid-March and had lined up a dozen or so meetings. But the weekend before I left, the US borders closed. As a Green Card holder, I (in retrospect stupidly) mulled over going nevertheless, but as more and more of the meetings were (wisely) moved to Zoom anyways, I stayed back and set up shop at the office and stayed there through Pacific Time office hours throughout the week. All but one fund stuck to their meetings.

Not surprisingly, a significant portion of all those calls became about how the funding landscape had shifted overnight due to Covid. There was a consensus that funding volumes would go down, as would valuations, with each fund offering their own perspective on what kind of businesses might be the most and the least affected. Most of the funds were still pretty gung-ho about continuing to invest in new deals, finding ways to overcome the limitations involved in not being able to meet people in person. Only a couple seemed to have gone all doom-and-gloom and were pulling back on investments in a big way.

After a couple of weeks of “first calls” like these, the management concluded together with the board that it would be wise to go into the process with a broader spectrum of possible outcomes. At minimum we wanted to raise enough capital to maintain the business at our current headcount well into 2022, setting us up for a traction-based round towards the end of 2021, while remaining open to raising a larger round if we could find the right partner to fund a conviction-based Series A in 2020. We were transparent about this with investors we were talking to, as different approaches could be a fit for different funds.

Throughout April and May much of my time was spent on conversations with VCs, tracking progress through 5 funnel stages:

1. Connection established
2. Intro call
3. Ongoing diligence
4. Strong interest
5. Term sheet

About a dozen funds made it to the “Strong interest” stage in this process. Several of them were among the brand-name VCs that are generally listed among the top VC firms around. A couple came close to issuing a term sheet in April. Others fell off before getting quite so close. The reasons varied: not their ideal stage, not fully convinced about our GTM-approach, couldn’t understand how enormous the potential market is, wanted to see more traction, etc.

Throughout the process, we would have 3–5 in the “strong interest” stage at each time, and that was the case in early May.

Enter NEA

The fund we ended up partnering with — NEA — actually came into the race pretty late. As one of the top US funds, I was obviously aware of them, but didn’t have an “in” there and hadn’t reached out to them on my own initiative. So interestingly enough, which only goes to show how complex the dynamics in a process like this can be, they were introduced to us by a fund that had already passed on GRID because we were too late-stage.

We had a great first call with them on May 8th. The associates on the call, Jordan Shapiro and Henry Magun, had a deep understanding of our space, had already read up quite a bit on the team and the company and both they and the fund had their own thesis about spreadsheets and productivity tools that closely matched ours. The week after, we had a call with a couple of partners at the fund. One of them was Forest Baskett, a long-time partnerat NEA, and — importantly for the story here — one of the first investors in Tableau back in 2004. He immediately got what GRID is all about and the opportunity we’re facing.

What followed were fairly intense 5 weeks of meetings between various combinations of people on both sides. As this was set to be NEA’s first fully-remote, post-Covid transaction, their due diligence process was set up to increase the overall exposure between the companies and bring in various perspectives from within NEA on the deal. On their end — in addition to the three mentioned above — Vanessa, Hilarie and Greg were most involved; on our side I looped in the rest of GRID’s management team, Thorsteinn, Alexandra and Eva. I’m pretty sure that by the end of the process, the NEA people most involved were just about fed up with some of my go-to jokes, but they persisted. :-)

In parallel, we reached out to startups and individuals that had worked with NEA before to conduct reference checks, and NEA did the same on our team and us.

By mid-June we’d reached full alignment on both sides, and agreed on terms for a larger, conviction-based Series A. A term-sheet was signed on June 16th. At that time we called off conversations with other investors in the funnel.

Toasting across 7 time-zones with our core team at NEA on closing day

We’ve been working closely with NEA for a few months now and are completely convinced that this is the perfect partnership for making the most of GRID’s opportunity. The combination of the strong funding, incredibly value-additive team, and the deep connections brought by NEA means that as a management team we’re quickly running out of excuses to not deliver on our mission to “reinvent the way ordinary people work with data and numbers”.

Lessons learned

Realizing that what I’ve described above is a GRID-specific anecdote, I wanted to pull out a few broadly-applicable lessons that I’ve taken away from our process:

• It is possible to reach a conclusion on a largely conviction-based funding round while only meeting over Zoom. In the case of our Series A, we gained mutual conviction by patiently spending time with each other on calls and diligently conducting reference checks. That said I can’t wait to meet the NEA team in person when circumstances allow for it.
• Without a lead investor, you have nothing. Funds that say they want to follow “if you find a lead” are rarely helpful, and can— as a matter of fact — get in the way of things. If you’re building a syndicate, it ideally consists of several funds that all want to lead, rather than a lead surrounded by followers that are simply piggybacking off of the lead’s diligence. We were lucky to close our Series A with an oversubscribed syndicate of insiders that had built their own conviction on the company over time and matched NEA’s enthusiasm for GRID. I sometimes wonder how follow-on funds ever get a piece of juicy investment opportunities.
• Like (other) sales processes, fundraising is a numbers game. In order to find funds that are a match on all the objective properties (see my list of questions above) AND understand your thesis AND connect you with the right investors initially AND can build a rapport (over Zoom) AND …so on… you need to cast your net wide. By starting our fundraise when we had plenty of runway and by maintaining flexibility on round size, we were able to entertain myriad conversations until we found the perfect partnership with NEA.
• Fundraising is an emotional roller coaster. You have to be ready for a lot of rejection and disappointment, and at the same time be able to plow on through to the next conversation with the same enthusiasm as the previous one. Even the fundraises that seem the smoothest and raise from top funds have bumps along the road.
• If the process has gone beyond a couple of exploratory calls, the best funds and partners will take the time to pass on an investment with a call where they leave you with a thorough understanding of their decision-making and often offer genuine help in moving forward. In my experience, female partners are more likely to do this than men.
• That said, every interaction is a learning opportunity. Especially the ones that go badly. Look for patterns in feedback. If you start hearing a lot of people having the same reaction, there’s probably something to it. Give it a deep thought. As an example, we shaped the way we think about our key metrics, and the product-led approach quite a lot throughout the process. That said, remember that nobody knows your company, your vision and your space better than you do — and a lot of the feedback you’re hearing is from people that have thought about what you’re doing for all of 30 minutes.
• Brand-name VCs are more likely to make big, leading bets based on conviction while the smaller and lesser known funds slant towards traction and follow-on investments.

In closing, it’s healthy to remember that fundraising in and off itself is not a metric of success. As Tim O’Reilly of O’Reilly Media once put it:

“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.”

With the tank filled, and a group of great travel companions, we’re definitely set to go places!

If you’re excited to learn more about GRID, you can join our beta here.