Ben Doherty, cofounder of Favor and Sunroom, breaks down what VCs actually want to see at seed and Series A stages. He covers the proof points that matter: signups, letters of intent, monthly active users, revenue. Series A companies typically hit $50K to $200K monthly revenue with 8 to 20 employees.
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So anyways, that's what I do now, and that's a little bit of my background. I guess before I get started, I have tons of different notes and things I can run through, but I just wanted to open up to you guys to see if you had any questions just in general that you wanted me to cover during this hour. Anybody at all have any thoughts about fundraising, or I don't know, I know some of you guys have maybe already have companies or have already raised money? In the back here. Oh, cool. That's a nice touch.
Can you hear me?
Yeah?
Oh, okay. My question is, how do you, when you ask for venture funding, say I wanted to ask for $100,000, what would make me say $100,000 as opposed to $5 million, am I just trying to say how much I need for a certain amount of time, or is it like how much I value the company? How do you get to that number, and like what are the things, what are the steps you have to take to come to like a good number that's like fair for you and kind of fair for the investors?
Yeah, so the question is, I mean, just to boil it down, really you're asking like, What are the proof points I need to show for raising $100,000 compared to raising like $5 million? So yeah, so I think that kind of goes into a much broader question of like, I mean, one way that that could get answered is just depending on what stage you're at, investors are going to have way different expectations, right? So this is sort of fluid, right? Like the stages, The stages have sort of evolved over time. I'll just explain to you guys where we're currently at, or where I personally see that we're currently at. And then we can go from there. So when you're at, let's say anywhere below, like you've raised $3 million, it sort of depends on what the company is. And that could be a little broader, but generally speaking, if you raise anywhere under $3 million, That's just broadly called the seed stage, which I'm sure you guys have heard of before. The seed stage, it honestly highly depends on what region of the country you're in. For you guys being in Silicon Valley, so I'm based in Austin, Texas, but I spent a bunch of time here in Silicon Valley and I've also tried to raise money on the East Coast. I don't know anything internationally, but as far as the United States goes, Silicon Valley is going to be, I guess, the most liberal in the way that they think about things. So you could raise up to $3 million just in seed funding here in Silicon Valley and maybe not have very little proof points at all. And so during the seed, the whole stage of seed funding is really, you're almost trying to, I call it strum the investor's heartstrings. Which is like, and what I really mean by that is it's much more of an emotional sort of decision. So to answer your question, Rick, around what do I need to show, it highly depends on what angel investor you're talking to in seed investment. They might just love your idea, or maybe you're literally solving this exact problem that they've been really curious about for a long time. And you were able to essentially emotionally convince them that you were the right entrepreneur to attack that idea. So it's so much of seed investments, and that's why I say under $3 million, it almost becomes harder as soon as you start having some proof points to look at. And so what are some potential proof points? Potential proof points could just be, As simple as, call it signups or interested customers. It could go, let's say you're building something that sells to larger enterprise companies. It might start with a letter, what's called an LOI, a letter of intent. Now if you're building a consumer company, it would probably be uses on the site. If you're building something that isn't even close to getting monetized, it might be MAUs, monthly active users, right? For myself, I've always built companies where we were measuring our actual monthly revenue. And for us, it was when we were doing deliveries, it was orders per month, favors per month we called it. With Sunroom now, we're measuring the amount of leases that we get per month. But the interesting thing about this is that it almost becomes harder to raise seed funding after you start having some traction. Because then all of the focus sort of shifts away from this emotional feeling of like, oh, I'm just betting on the entrepreneur, right? And I'm just betting on the entrepreneur and, oh, and I'm excited about the problem they're solving, or I think— that's going to create a positive change in the world. So as an investor, I'm excited about investing in this entrepreneur to create that positive change in the world. That's how a lot of investors would think, right? They're going to say, I want to take my money, I have this amount of money laid out, I'm going to invest in this many X entrepreneurs, and I want to use that money. Yeah, of course I want a return on my investment, but I'm specifically wanting to bet on the changes I want to see in the world. So it's almost like when you're in the seed stage, which I imagine almost all of you guys are, if you're thinking about raising money from investors, you want to have it be an emotional sell basically as long as it possibly can. The sooner you start talking about all of basically your traction or your metrics that you have, and if they're not good yet, you're really almost making it tougher on yourself because then it becomes the investor shifts their mindset and starts almost thinking too logically. Now they've gone, and now if it's strictly looking logically, now they're starting to compare your traction against other people's traction. And at some point you can't, you can only stay in this sort of emotional sell stage so long. And it kind of depends on how long you've been working on your startup. It also depends on, I guess, how mature the actual space is that you're working in. So if a space is super mature, investors are going to be a lot more logical and it's going to be harder to sell them emotionally. If you're working on something that's not mature, let's like space travel for example, that's not a mature market at all. That might be something where you can sell them emotionally for a lot longer period of time and then that sort of impacts what they expect to see in a pitch. Now I will say, where all of this stops, a lot of it stops being emotional and less about the team and less about your idea, is when you get to Series A, which is when you truly come out of seed stage. And from what I've seen, Series As could be, generally speaking, you're gonna be making anywhere from, call it, $50K a month on the extremely low side of revenue, all the way up to $150K to $200K per month in actual revenue. And those are solid numbers. And your Series A, your actual team size at Series A is probably gonna be around anywhere from 10, 8 employees to 20 employees-ish. Now these are all, I'm sure if you talk to a VC they could collect all these numbers and give you better data, but this is from me. Personally talking to lots of VCs and also having lots of different friends who've gone through this process and learning about where exactly they were when they raised that money.
