The Series A Trap

No other financing round has probably destroyed more exit dreams of founders than the Series A.

This realization is based on some data I found and countless conversations I had with two groups of SaaS founders:

1. VC-backed ones that have raised a seed round and made it to Series A, but were not able to sustain exponential growth thereafter.

2. Bootstrappers who decided to raise capital at ~$1-2M ARR (= Series A stage) because they thought it would help them grow faster which it ultimately didn’t.

If you've made it to Series B, you've typically shown strong growth up to ~$10M ARR and therefore have a much higher chance of success / a great exit.

There is also a chance of a bright future for post-Series A dropouts. But the vast majority of conversations I have are with those who are not among the lucky ones.

Understanding the Stakes: Series A Funding Benchmarks

Recent data from Carta shows that the current Series A in SaaS tends to be >$10M, with a pre-money valuation of >$40 million. This means startups will be valued at >$50M on paper after the financing round.

Even if your startup is classified as an “Outlier” according to the Series A benchmarks from Robert and Harry's session at SaaStr Europe, this would correspond to an ARR multiple of 20x.

Post-Series A, founders might face around $10-15M in liquidation preferences and have already given away between 20-40% of their equity to investors.

If investor stake x exit proceeds < money invested, investors would exercise the liquidation preference (1x money invested) and founders will get what's left. Otherwise, the exit cake is divided according to stakeholding.

Rethinking the VC Path: When to Consider Alternatives

If Series B now seems out of reach based on your numbers, it probably means your startup is not growing fast enough.

However, depending on how far you have come and the amount of money raised, you may need to exit at or above the current M&A market multiples to be “in the money”.

Mediocrity in terms of business performance and the need for a phenomenal exit are a difficult combo.

If you lack complete confidence in your company's potential as a VC success story and a clear plan for scaling the business further (exponentially), it might be wise to reconsider raising a Series A.

This year, I've already had numerous M&A discussions where founders made the mistake of proceeding without such confidence and are now likely to walk home with $0 on exit.

If you have any doubts, the last good opportunity to get out of the VC game seems to be after the seed round. Or, if you haven't raised any money yet, to just continue on the bootstrapping path.