Last week, we kicked off a blog series to help founders determine their company’s core priorities and strategies at each stage of the progression from seed to Series A and Series B.
In the previous post, we outlined what startups should focus on right after raising a seed round. The next stage in the journey is the A round, and as expected, it brings a brand new set of priorities.
Focus on distribution and understanding your business
Between seed and Series A, a startup typically needs to focus on product-market fit. Next, figuring out distribution is generally the most important thing to solve between Series A and Series B. Before raising your B round, you’ll need to be able to show how you can scale sales and marketing and that you are starting to really understand your business. In other words, you should demonstrate that revenue and/or engagement are repeatable and achievable in a cost-effective manner, and not just a function of pent-up demand from a small segment of underserved customers that will dry up in the near future.
With that said, you’ll need to understand what sales and marketing channels work (and scale), what your customer acquisition costs are, and how much a typical user is worth over their lifetime with your company.
For example, if you are building a consumer business, you should be watching for the following metrics:
- LTV/CAC: Ideally, your Lifetime Value: Customer Acquisition Cost ratio is over 4:1. It’s even better if you understand the LTV and CAC for each of your major marketing channels and customer groups.
- Retention rate: What percentage of users can you retain quarter over quarter? This metric is over 90% for best-in-class startups and is a huge driver for above mentioned LTV.
If you are building a SaaS company, consider:
- CAC payback is ideally below 24 months – and under 12 months in the best scenarios.
- Customer churn: Churn should ideally be under 1% per month. It’s even better to be net negative (expansion dollars > churn dollars).
At this stage, you are ultimately trying to create a model that shows how a $1 investment in Sales and Marketing creates $x in additional revenue – so when the Series B comes around, a new investor can get comfortable how a large amount of additional capital is being used to truly scale the company.
Hiring after an A round
At this stage, generalists are still more valuable than specialists but you should start to bring on expertise and hire directors / VP’s in areas where your playbook is clear…for example, engineering, customer service / success and finance. Try to avoid hiring specialists in areas where your playbook is still in development and where a founder is the best leader…for example, product, marketing, and sales.
As you are starting to scale aggressively in this phase, we would also recommend that you invest in an internal recruiter (or even a team of recruiters) – hiring successfully and at scale often comes down to the depth and breadth of the hiring pipeline and having somebody focusing 100% on this task is usually the most important driver.
As always, we welcome discussion so please share your thoughts and observations about a company’s priorities after raising an A round. And next week, we’ll be sharing the third and final post in this series, “You just raised your Series B, now what?”