A Note on Notes – A follow-up to raising late/post seed rounds

I wrote a post recently on late seed / post seed rounds for saas companies in Europe and received a lot of comments asking to expand more on the benefits of a convertible vs. a priced equity round. At the bottom of this post I’ve also included how to structure a convertible with the relevant terms from what I’ve been seeing over the past few months.

The benefits of a convertible note for a startup that has made tremendous progress since their seed round but is not quite ready for a Series A are (i) it is faster than an equity round to raise (ii) your legal costs are cheaper (iii) you can keep the note open and have a rolling close to build on fundraising momentum (and hopefully continued good traction in the business).

Faster to raise

I have noticed over the years that there is something about the psychology of investors and convertibles that for one reason or another they can make a decision much faster about leading or participating in a note vs. a priced round. It could be that the legals are more straight forward (and shorter). The diligence and number of meetings is probably equal, but when you move past the term sheet phase and are trying to close the equity docs, things can stall. In Europe (where I invest and where I have much more data), convertibles also tend to have more investors involved than in an equivalent size equity round.

The other thing I have noticed is that when founders raise a convertible and are going to the market looking for new money instead of relying on their existing investors, founders set the price. So this takes even more time out of fundraising because in one meeting, you can do the pitch and disclose the terms of the convertible. This makes it very straight forward for an investor.


You can use industry approved documents like Seedcamp’s Convertible Note created by JAGShaw Baker and cut down on how much time your lawyers spend negotiating and updating your docs. You also won’t need to cover any of the investors’ costs so you will save at least £10-30k in precious equity.

Rolling closes

To me, this is the single greatest advantage of a convertible. Let’s assume you are growing 15–20% MoM, have a healthy pipeline, and have some great reference customers and are raising $1.5m in late seed. You have a new investor plus a well known angel who either set the terms with $200k or were the first to sign a term sheet with the terms you set. Also, your existing angels are investing $100k.

You can communicate to other potential investors that you already have $300k committed, including relevant angel x and hot software exec y, and can go to the market from a position of strength (insiders are re-upping and they have a strong new lead) which gives other investors social proof. It also makes it really easy for other investors to come in because (i) the terms have been set and (ii) they can see a book being built with exactly who else is coming into the round. It is typically in this scenario that 2–3 VC funds will jump on board and commit $300–400k each and get you to the point where you are oversubscribed.

Furthermore, the rolling close gives you the flexibility to focus on short-term growth within the business (on-boarding your first sales people, closing your first six figure deal, developing your customer success program etc). Founders that I know that have successfully raised late seed convertibles were almost always oversubscribed by the end of the process due to the social proof of having investor x or y committing to the round and/or having reached another key milestone during the fundraise. I don’t have a large enough data-set to know exactly what amount founders were looking to raise vs. what they ultimately raised, but the main benefit of the convertible is it allows you to reach your funding goal in a faster time frame with the potential to raise even more once you built momentum. Not to say that you can’t do this in a straight equity round, but the inflection point of company traction, fundraising traction and creating real FOMO amongst VCs is a delicate act.

Relevant terms

There are several key items to be aware of and Carlos at Seedcamp wrote an excellent post on this a few years ago, so I thought it would be more beneficial to share terms that I am seeing in the market now. These only pertain to that late seed convertibles and are for the software companies with good to great traction:

  • Valuation Caps – $5–6m for companies early in generating revenue but with good growth. $5–8m+ for companies on c$50k MRR+ and typically $10–12m+ for those nearing $100k MRR with very fast MoM growth (as well as those founders that tell the best stories and create FOMO).
  • Discounts – Almost always 20% but I have seen as high as 25%.
  • Interest – 5-6%.
  • Conversion rights – Typically anywhere from $500k to $2m.
  • Maturity – Typically 3 years
  • Other rights – Typically no board or board observer rights are given; information rights are given but you’re probably not sending out monthly board packs yet


Post Seed Rounds in Europe for SaaS Startups (or Why You’re Not Ready for a Series A)

Most early stage company financings go something like this these days:
(Self-funded / Friends and family / Accelerator / Pre-Seed Round) –> (Seed Round) –> (Late Seed Round) –> (Series A)
(Seed) -> (Late Seed) -> (Series A)
Very few go from Seed directly to Series A which was the norm for a very long time in the venture capital industry. Why is this happening?
Following a seed round of $500k to $1m+ most saas companies increase headcount in engineering and product and eventually make their first commercial hires. Depending on the complexity of the sale and the size of license, most startup founders will close the first 10-20+ deals before hiring anyone in sales. If you are in a category where you can survive and grow through self-service, then most of your ‘commercial’ money will go towards growing your marketing and support/ops teams.
The best saas companies I’ve seen across Europe over the last two years raised less than $1m in seed and were able to get to $300k+ in MRR and continue to grow organically without needing venture $ (but still took venture $ to grow even faster). In very good cases, companies raised up to $1m in seed and by the time they closed their A round were on more than $100k MRR and operating at close to cash flow b/e. In most other cases, I see companies get to anywhere from $10k to $75k MRR on their seed capital. For some companies selling into large enterprises with large 5 or 6 figure ACV deals (for example many security co’s or next-gen infrastructure co’s) I’ve seen several of them go through $1m of funding and have several live POC’s but no real revenue, just the hope of converting an attractive pipeline (which is a huge positive btw). 
Controlling for team, product, market and time – until about late 2015, these numbers used to attract Series A investors who would lead rounds of $3-5m. But the majority of these investors have moved up market and now want companies on a minimum of $1-3m ARR with positive sales economics and at least one or two quarters of renewals. This is all-good, and makes a lot of sense for some funds, but what do you do as CEO when you eventually find product/market fit AND an early replicable sales model and need to raise further funding to support your growth.
Welcome to the land of late seed, post seed, pre-A, – wade through the nomenclature and pick your own term for what this is….(I prefer late seed for no reason in particular). What late seed is not, is a bridge round where you need more cash to hit product market fit. Some companies spend all of their pre-seed or seed capital before hitting pmf, and it is typically existing investors who throw good money after bad to continue to fund them, not new investors.

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Venture Capital Disrupts Itself – New Data on the Asset Class

Investment advisor Cambridge Associates just published a report entitled Venture Capital Disrupts Itself which has some fascinating VC performance data in it. Cambridge makes money by advising large funds such as pension funds and endowments on asset allocation strategies. This includes their alternatives strategy, of which venture capital is one small part. Given Cambridge have one of the largest datasets on underlying venture capital performance globally, this is an important piece of research for the asset class.

Let’s take a step back into history and learn how the majority of the best US funds marketed their firm to their investors for the past ~20 years (excluding the bubble period). In the venture industry, there is a belief that about 15-20 companies a year make up the majority of the returns for that cohort. Paul Kedrosky published a report with the Kauffman Foundation entitled, The Constant: Companies that Matter that analysed the number of companies in the US that get to $100m in revenue by location and sector – the underlying hypothesis being that if a company is able to get to this level of revenue then depending on their growth and product category, they should be able to command a premium valuation on the public markets or in an acquisition. Having seen several VC fundraising decks, this is one of the main arguments they make on why LP’s should continue to back them, “there are 20 deals a year worth getting into, and we are consistently getting into these deals. You’re either in them or you’re not.”

Because of this belief, it has been incredibly hard for first time VC funds to get raised as investors into these funds want to see how they have a competitive advantage to get into one of these 20 companies every year. It’s certainly true that success breeds success, so the best SV funds are almost always oversubscribed by their existing investors. So the argument that a small number of VC firms invest into a small number of companies a year that make up the bulk of the returns of that cohort makes logical sense.

The Cambridge report demystifies this claim of only 15-20 companies making a difference on VC fund performance and sheds new light on how the VC industry is continuing to evolve – and in new markets like Europe and China, finally mature. What their analysis of the top 100 venture investments as measured by value creation (note this means total gains) per year from 1995 through 2012, shows is:

  • an average of 83 companies each year account for value creation in the top 100 investments for each year;
  • in the post-1999 period, the majority of the value creation in the top 100 each year has been generated by deals outside the top 10 deals;
  • an average of 61 VC firms account for value creation in the top 100 investments in venture capital per year; and
  • the composition of the firms participating in this level of value creation has changed, with new and emerging firms consistently accounting for 40%–70% of the value creation in the top 100 over the past 10 years.

The report goes into a lot more detail on the above stats, but what is so interesting is that the distribution of VC returns have changed dramatically since the bubble period. The majority of returns today in VC now come outside of the top 10 largest companies. So this means a larger number of funds today are investing into a larger number of strong performing companies globally. To the players in our ecosystem this all makes sense. On the demand side (ie founders seeking VC) the costs of starting a company are cheaper, every industry in the world is being digitised, new markets continue to be created, and there is more talent in more cities across the globe from which to build your company. On the supply side (ie VC funds investing capital), VCs are creating more specialist funds to differentiate themselves from the platform and multi-stage funds to try and add more value, VCs are innovating by creating value-added services for startups (networks, HR support, sales advice, PR, etc) and the list goes on.

As a VC based outside of the US its great to see hard data on how much non-US company performance plays into the top 100 deals each year. From 2000-2012, they represented an average of 20% of the total gains in the top 100, compared to an average of just 5% from 1995 to 1999, and they reached as high as 50% of gains in 2010. Note, this also includes gains in other countries like India and China, not just Europe.

On top of this, for the last 10 years, 40-70% of the new gains were made be new or emerging managers. As Cambridge reported:

“This makes sense: emerging managers have shown an increased willingness to capture the greater diversity in investments occurring in the top 100. For example, in the post-1999 period, 25% of the total gains driven by emerging managers in the top 100 have come from ex US investments, versus just 11% for established managers. Emerging managers are also highly likely (though not necessarily more likely than established firms in the top 100) to make their initial investments at the seed- and early-stage.”

For Europe, there were a few new exciting VC firms that closed their first fund in 2015 (Felix and Mosaic) and there are more newer funds coming to market in 2016. For European founders this is powerful – more choice from who to raise capital from and more support at every stage from seed to growth. And for LP’s, its never been a better time to get access to new emerging VC managers. There’s never been a more exciting time to be building a technology company anywhere in the world, and I’m proud to be supporting entrepreneurs from all over Europe to achieve their goals.


How Startup Founders and CEO’s Rate the Top VC’s in SV

Someone shared the latest YouGov Entrepreneurs Poll with me recently and the findings are very interesting.

They interviewed a select group of founders about their experiences working with different VC’s and asked them about what they wanted from their VC and what they were actually getting from them. Here are some of the key findings: Continue reading →