Early Stage Venture Capital: What characteristics should a startup have during a Series A?

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Kruze Consulting Startup Q&A Author
Vanessa Kruze
Founder, CPA

Before joining Kruze Consulting to help startups with their Accounting & Finance, I was a partner at Lighthouse Capital, a venture lending fund, so I’ve invested in tons of startups and have seen what it takes to raise a Series A.

The most important attribute is to Develop a Novel Approach to a Big Market Opportunity. VC’s are looking for big outcomes and can stomach some losses, but their winners have to pay off big. Therefore they make a lot of bets in big markets knowing (hoping) that a few investments will pay for the losers and much more.

A big Market Opportunity is not always obvious. Often you solve a small problem in a big market and then find more opportunity than you could have ever imagined from the outside. Airbnb is a great example of this. Originally they were just creating a way to rent out your couch, but soon realized they could revolutionize the entire vacation rental industry.

The Product or Service you are building or the way you are approaching the market should be new. However, often the best startups are minor improvements on old ideas that never quite worked. You also don’t have to be first to market. Lending Club was 3rd or 4th into online lending and it turned out all right for them. The most important thing to do is build something that you love for a market that you have extra special insights into. That’s how you build a great company.

VC’s will judge your Management Team but that doesn’t mean they are looking for tons of experience. They’re really testing your insights into that market. They are looking for someone who is hungry. Someone who has to build this company.

They will also test your Go to Market Strategy, or customer acquisition approach. Nowadays with Google and Facebook, you can do a lot of customer acquisition testing to see what might work.

Investors will want to see a Financial Model that shows what you will do with their money. It’s that simple. “Where are you spending my money?” is a question you’ll get in pitches. :)

They will also want to understand the Competitive Landscape. Know who you will compete against and be able to explain their approach. Good ideas are never lonely, so do not be intimidated by big competitors, especially public companies.

Startups often give big companies too much credit but they move slow. While they are caught up in budget meetings and resource allocation disputes, you will be building your product and go to market. In fact, you want to build startups in markets with big, slow competitors. It means there is a higher probability you will have the opportunity to be acquired when the big companies realize they lost.

Finally, to get the Series A, you have to convince the VC that you are someone special. They are making a bet on you, the Founder. Show them who you are through hard work, frequent updates and traction. That’s how you get your dream funded. :)

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