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.

First, some numbers before advice on what you can do. Four of the last five companies my long-time collaborator Krishna and I have personally invested into in 2016 in Europe were all in this category of late seed. In every case they had shipped products that were being actively used (and loved) by customers, were early in figuring out sales execution and could demonstrate how they could continue to grow to $100k+ MRR.
They had flirted with several of the usual funds in Europe but ultimately, those funds wanted to see more metrics. “Come back when you’re on £€$100–200k MRR”. “Let me know when you’ve closed your 10th deal”. “I’d really appreciate you keeping us updated on your progress – let me know when you’re ready for your Series A”.
Many of them had lofty ambitions at the beginning of their fundraise. “We are ready for our Series A and need to raise $5–8m to grow our sales org, open an office in the US next year and stay ahead of our competition”. I’m not advising you to stop being ambitious, but you need to get a grip on reality so you at least appear to know how to play the game.
I have advised numerous companies over the past few months on this exact topic and hence I felt it was worth sharing in case there are other founders out there wondering what their options are to continue funding their growth after raising a seed round.
If your company ticks most of the following boxes, then it’s likely you will struggle to raise a Series A and should consider a late seed round:
  • Are sub c$100k MRR and can’t predict sales growth next quarter
  • Can’t definitely demonstrate your sales cycle
  • Have not had a renewal cycle or haven’t up-sold any existing customers
  • Need at least 6–9 more months to figure out some basic problems relating to sales which gets you to a major new milestones in the company
  • Need further time to release further features to move customers from POC to closed contracts
  • Still pre-revenue but have multiple POC’s with potential customers that are happy to take a reference call and share why they will most likely purchase a license
The benefits of raising a late seed vs. Series A round:
  • It takes less time to raise, especially if you raise using a convertible note
  • It allows you to set and hit clear milestones which should enable you to raise a larger round of equity in x months than you could now at a higher valuation, thus taking less dilution overall
  • You don’t need to create a formal board with monthly reporting which in most cases I believe is suboptimal anyway until Series A
  • You don’t have the pressure of scaling too early from raising too much money
So finally, what is a late seed or post seed round?
From what I’m seeing companies needing to get to Series A, to me late seed is $1-2m that gives the company enough runway to last for around 18 months: 9–10 months to reach major new milestones, 3 months to raise a Series A and c5 months of cushion. It is the round between your angel round and a bigger institutional round. It is likely a convertible note with a cap and a discount to the next round. If it is a priced equity round, then it is probably an increase in valuation to your last round, but most of the time it is a 20–50% increase (though the range is vey wide). Ideally, your existing investors still believe in you and they are able to be the first investors to commit to the round to get momentum going and will ideally comprise of up to 15–25% of the round.
A minimum viable late seed round is your existing investors giving you a convertible note to last 12 months. But this in unlikely in Europe as your seed investors are most likely very small funds or angels who may want to share the burden of funding with new investors so they are not completely tapped out with what they had reserved for your company.
A base case round is led by your existing investors or with your existing investors waiting in the wings with one small new investor (min 6 figures) setting the pricing/mechanism.
The best outcome is a new lead investor setting the terms, with the majority of your existing investors participating, with the lead investor reigniting enthusiasm amongst your existing investor base and eventually getting the round oversubscribed with other value adding investors (angels from your sector, international angels etc). In an ideal world, the new lead is also positioning themselves to follow-on substantially and either lead or co-lead your Series A and support you in getting that round raised quickly and efficiently.
The main difference between a seed round and a late seed round is that late seed round investors will be judging you based on actual metrics instead of just the team and the product/story. So make sure that you have all of the documentation ready before you start fundraising as investors will want to see milestones, a real budget, a pipeline and will want to reference several of your existing customers. This requires a lot of preparation so don’t put it off until after you have started speaking to investors.
Thanks to Krishna Visvanathan for his added thoughts and edits on this post.