Early vs growth stage investment: what's the difference for founders?
“I always think of angel money being a question of ‘do you have friends?’ Seed is ‘do you have a good idea?’ And series A is all about ‘can you scale?’”
So says Don White, co-founder and CEO of conversational AI platform Satisfi Labs, which has raised $10m since its founding in 2016. But what are the nuances that separate the different funding rounds? What should founders bear in mind when raising investment? And how do VC’s expectations and wants change?
Between them, Sports Loft companies have raised in excess of $100m to date, so to find what they learnt from the different funding rounds, we spoke with CEOs from three of our member companies – Ben Reynolds, co-founder and CEO of Spalk; Daniel Kirschner, CEO, co-founder and president of Greenfly; and the previously mentioned Don White. These execs have been there, done that – and know what's required to raise money. We also picked the brains of VCs at some of the most active firms in the sports, media and entertainment space: Cordero Barkley of TitletownTech, Jasmine Robinson at Causeway and Lance Dietz of KB Partners.
How we define investment rounds
Terms such as ‘seed’, ’pre-seed’, ‘series A’ or ‘series B’ get thrown around a lot when companies are fundraising. But what one person recognises as a series A might be what others think of as seed – and vice versa. Interpretations differ based upon factors including industry, investor appetite and geography – a seed round in New York might be seen differently in Chicago, LA, London or Sydney.
Instead, at Sports Loft we tend to talk more about ‘early’ and ‘growth’ stages, where seed is approximated as an ‘early’ round, and series A and B are seen as ‘growth’ stages. In this model, the early funding rounds give founders the time and space to explore whether their business is viable and to find market fit. The growth stage allows them to capitalise on that viability and execute their plan.
“There are definitely differences between seed and series A,” says Lance Dietz, partner at early-stage sports tech investor KB Partners. “We generally categorise seed deals as pre-PMF (product-market fit), while series A are more about optimising the growth engine once you’ve hit some form of PMF.”
Lance’s comment reflects how a VC will expect to see different, often more quantifiable, metrics as a business matures and has more evidence to back-up its business model and growth forecasts – indicators the company is de-risking the opportunity for potential investors.
“We typically invest in series B and beyond,” says Jasmine Robinson, principal at Causeway, a growth stage VC which has invested in Formula E, Freeletics and FloSports, among others. “Earlier stage investors are open to more risk but look to be compensated for that risk with a lower valuation than the same company would receive in a later round. But typically, series seed companies have less traction than series A – and the same goes for series A to series B. ”
At the early stage: the power of team
“At seed, we lean heavily into the team,” says Lance at KB Partners. “No team looks the same, but we want to know that they have a unique advantage or insight into what they are building. They also need the ability to build, test and execute what they envision.”
At the early stages, the team in front of them is the main thing that investors have to judge the potential success of the business. At this point in the company’s development, there may be an initial product, some early users and some user data but there won’t be much else for investors to rely on. “At Seed the investors are a little bit more backing your team and its vision,” says Ben, CEO and co-founder of Spalk, who took the company through a successful funding round in June 2021. Daniel Kirschner, CEO, co-founder and president of Greenfly agrees: “At those early stages it's about selling who you are and convincing investors that you have the ability to execute.”
Investors we work with at Sports Loft tend to look for indicators such as previous successful exits, a strong network or first–hand knowledge of the problem that they are solving. For Don White, who led Satisfi Labs through its series A in September 2021, the experience of his fellow founders was invaluable in building trust with investors.
“We were all a bit older, so we'd already had business track records at larger companies,” says Don. “We’d all been part of startups at some point previously, so investors felt we could probably do what we theorised.”
But as VCs increasingly look to younger founders and those from more diverse backgrounds, is this approach changing? “The team dynamic used to be that you had the experience in your team,” says Don. “The newer approach is that you know who to tap with external experience. In that case, you've still got to be a talented, intelligent and articulate founder with a good idea and passion that the investors can see, but crucially you’ll know people that can help you along the way. That’s the new team dynamic.”
At the early stage: selling your vision
If you were at the Sports Loft Showcase you'll have seen how each of our member companies can articulate a compelling vision of their futures, comprising the problem they're solving, the scale of the market opportunity and why they have an ability to disrupt their sectors. Being able to do so will have been vital in helping them raise money.
“It's all about the vision,” says Greenfly's Daniel Kirschner, which has raised more than $20m over several rounds. “You have to sell a vision that’s compelling.” This is backed up by Lance at KB Partners, “We want to see a vision for building a large business which inevitably means a large market and market growth.”
Ben at Spalk agrees. “The story you present to investors is paramount. It’s about why you think this business is worth the valuation you're pitching it at, and why it will be valuable for them at exit,” he says.
The most compelling part of any vision is often the problem that’s being addressed – and why solving it is worthwhile. “Providing a clear description of the problem you are solving and why it adds value is very important,” says Cordero Barkley, partner at TitletownTech. “As simple as that sounds, so many founders miss that mark when we first meet with them.”
At the growth stage: emphasising traction
As a company matures and approaches its growth rounds, the best founders shift focus from storytelling to data. This stems from the change in VC expectations, says Daniel from Greenfly. “From an investor’s point of view, as the business progresses the growth expectations become more modest, so the reliability needs to become more certain. Later on, what investors are looking for changes and becomes things like revenue, growth numbers et cetera.”
This mirrors the experience of Spalk as it went through its growth round. “At series A investors are backing more of the business and the results you can show, so it's far more quantitative,” says co-founder Ben. Aside from revenue, Spalk could point to the growth in hours of commentary or the numbers of new broadcasters signing up. For Greenfly it might have been be the increase in the amount of social content shared or the number of athletes on the platform. For Satisfi, the increase in the number of fans’ questions answered or the cost savings for clients.
“Traction numbers could include revenue, customers, users or partnerships,” says Jasmine at Causeway. “Typically we look for indicators that give us confidence that the business model is working and the leadership team is strong and reasonably complete. We like to see $5m to 10m in revenue and specifically go-to-market metrics like customer acquisition cost, retention, renewal rate – for multiple cohorts – that prove the economics of the business are working. As companies mature we like to see gross margins reaching a sustainable level to lead to profitability as the company scales.”
It’s about being able to provide hard evidence that prior to pouring cash into a business, VCs can have confidence that the founding team can execute. “At series A and beyond, we focus hard on traction dynamics, scaling strategy and unit economics,” says Lance at KB Partners. “We’re looking for convincing insights into the market opportunity.”
Prior to Satisfi Labs’ growth rounds, Google invested in the company in an extension of the conversational AI startup’s seed. The in-depth due diligence required meant Don reckoned he had all the evidence of traction needed for any forthcoming rounds. “We had to provide a 50-row spreadsheet,” he says. “And each row had four or five sub-bullets of information – everything from customer contracts and durations to payment cycles and employee NDAs.”
But even this wasn’t enough for investors coming in at subsequent rounds. “The series A was different and each investor has their point of view. Google was more about the partnership, the tech, and what we could do with the tech in the future. Looking at the series A, investors were more like: ‘how far out can you project revenue, given the contracts you have and their expirations?’, or ‘what does your LTV (customer lifetime value) look like and what’s your CAC (customer acquisition cost)?’ It was much more heavily a financial analysis.”
At the growth stage: building a roadmap
Once at the growth stage, it’s reasonable for investors to expect founders to have figured out what works and what doesn't, and to have a clear plan for how they’d put a cash injection to work.
“We create milestones for each and every time we take investment,” says Don. “We say: ‘this money is going to take us to this revenue number, cash flow, burn number and employee number.’”
The most effective presentations we see at Sports Loft include strategies outlining how much founders need and what it’ll go towards regarding product, team, revenues and tech. This kind of forecasting gives you a “report card”, says Don. “If I do another round, I can say, ‘here are the things I told you I would do with your money, here are the things we did with your money and here's what we could do with more money.’”
That approach is reflected by Jasmine at Causeway, who says: “We’re looking for assurances that with more capital, the team has a proven way to drive growth.”
Gathering data to support investment
According to Don at Satisfi Labs, “the difference between series seed and series A in paperwork is a mountain.” One of his biggest regrets from Satifi’s early days is not spending enough time on gathering and filing the basic operational information about the business – from customer contracts and their expirations, to a paper-trail of the company’s incoming and outgoing employees and any NDAs that had been signed.
“Going in now, I’d do it from day one,” says Don. “If I had a team of five people, no matter how little money I had, I’d find some CFO-style person to spend a couple of hours a week doing what was needed to build a basic data room.”
Getting the valuation right
Securing a valuation and round-size that works for the company and is attractive for investors is something that Sports Loft companies have had to become adept at as they’ve raised money over multiple funding rounds.
“One of the things that we've always been very deliberate about is making sure that we raise at an appropriate valuation and don't set ourselves up for failure,” says Ben at Spalk. “A lot of companies have done that over the past two years – raising crazy amounts of money at high valuations that they'll never be able to grow into.”
That’s echoed by Daniel at Greenfly. “You don't necessarily want to push for the biggest possible round,” he says. “If you end up with a really big round and a really big valuation – one that’s outside what you can deliver – the worst thing that can happen is to have a down round or to be static. Those are really tough outcomes and they wreak a lot of havoc.”
Don at Satisfi feels similarly, but has mixed feelings about exercising too much caution. Coming from a financial background, Satisfi’s founders felt that if they could represent the business as a low risk, good reward proposition, without promising the moon, they’d be sure to land the modest funding they knew it required to turn the business into a success.
“I remember one of the VCs saying: ‘we're looking for the next Spotify.’ And I said, ‘I'm providing you almost a near guaranteed low risk multiple on your investment. I don't need a lot, but I can return a lot. If we only grow by X amount then I'm going to be able to sell for Y’. Man, I was shocked at the negative response that I got!”