Has the bar for Series A changed?

(Shutterstock)
(Shutterstock)

There has been a lot of discussion recently about the bar required to raise a Series A.

A few notable excerpts: Kyle Alspach’s commentary on seed and Series A at BetaBoston; Brad Feld’s tweet a few weeks ago that “$100k MRR [monthly recurring revenue] used to be interesting. Now it’s table stakes”; Jo Tango’s blog post on the VC bottleneck in Boston; and Mike Volpe’s comments on a post from my blog on raising seed rounds vs. Series As. In fact, Mike allowed me to publish the following facts: When HubSpot raised their $5 million Series A in 2007, the company had $12,000 in MRR from 48 customers. They had previously raised $500,000 in seed, plus about a $1 million note shortly before the Series A.

I can summarize the sentiment here in broad strokes. The “traction bar” for Series A rounds is higher than ever. On top of that, there are fewer Series A investors now than there have been in the past (at least in Boston). And the investors that do exist have “no guts” (or so the dialogue goes).

Wow, that sounds really bad. Maybe we should all just close up shop.

I’m not quite as pessimistic. In fact, at this moment, we have a few early-stage companies in our portfolio at NextView Ventures that are raising really nice rounds in the face of this perception. One of our portfolio companies has no revenue, and good but not explosive user growth, and yet it’s still raising a very nice Series A from a very good venture capital firm at a significantly higher valuation from our seed. Another company raising Series A doesn’t even have product in the market yet, while the third falls far short of the $100,000 MRR number despite raising from a top West Coast firm. How do I reconcile this experience with the observations above, which seems to ring true for others as well?

My first and main thought is that an objective “bar” at which VCs will want to invest in a company doesn’t exist — nor has it ever existed, nor will it exist. I get asked this all the time, and the formula just isn’t there. I know that over the last several years, there has been standard guidance for SaaS companies to try to focus on getting to $100,000 MRR before raising an A. There are other benchmarks in other segments too. I think these benchmarks are helpful in allowing an entrepreneur level-set their progress with what others have been able to achieve in similar markets. But I just don’t think it’s the right way to think about the bar for raising a Series A round.

Instead, I think the most important factor that VCs consider is the strength of the team and the excellence/uniqueness of the idea. After that, they are looking for some demonstrable evidence that things are working. This is where traction comes in. If you are working in a very crowded space, you probably need more traction to show separation from others in the market. But if the space is brand new or uncompetitive, then the traction bar will be lower.  Also, if the team or idea isn’t excellent, then the traction bar will be higher. VCs are very good at convincing themselves that a team or opportunity is interesting if there is enough traction. But still, I find that the most unique and exciting companies are able to raise capital with relatively limited traction because the right investors require only a small amount of proof to be excited enough to jump in.

I think this was the case for HubSpot in ‘07, and I’d bet it would still be the case for them if the fundraising environment then was like it is today. Sure, not everyone would be jumping up and down to invest, but those people would have been very wrong, and fundraising at the early stages is the search for true believers.

Image of a cartoon man via Shutterstock.

Rob Go is a partner and co-founder at NextView Ventures in Boston.
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