Oct 14, 2024

How to Navigate the New Reality of Series A Fundraising

The Series A landscape has evolved. For many startups, the path from Seed to Series A is now more challenging, with a heightened emphasis on metrics, milestones, and capital efficiency. The days of growth-at-all-costs are fading, replaced by a more disciplined approach from investors. In this article Tim Schwichtenberg, Senior Investment Manager at Bloomhaus, explores the key changes that have reshaped Series A funding, offering insights for founders navigating this new reality.

With Series A investments falling for five consecutive quarters according to Crunchbase, investors are more cautious and expect companies to have clearer paths to profitability. This was also confirmed in our recent panel discussion at the Bloomhaus Family Day with representatives from renowned series A VCs and experts from BMWi Ventures, Redstone and ZKB. All in all, we see shifts in four major areas:

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1. Geographic Differences Set the Tone for Series A Fundraising

‍Geography plays a pivotal role in how investors evaluate startups. For founders preparing to fundraise, understanding differences across regions is essential. While European investors place greater emphasis on market fit and technology differentiation in the U.S., Series A rounds still tend to focus heavily on financial performance and scalability. The expectations in Europe for Series A can resemble what was traditionally seen as Seed in the U.S., making it more challenging to stand out in a crowded field. So, what qualifies as late Seed in Silicon Valley may well be seen as late Series A in Berlin or Paris, adding complexity for founders who are planning to raise across borders.

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2. The Changing Size of Series A Rounds

‍Series A has grown up - literally. Gone are the days when startups could raise an A round with a few million in revenues and a promising trajectory. Founders should understand that Series A rounds today occur much later in the company’s lifecycle. What used to be a Series A in 2018 has shifted, and for many, Seed rounds have now ballooned to sizes previously only seen at Series A. A 2m USD Seed round was impressive just a few years ago, but today it’s considered standard. Meanwhile, Series A rounds have scaled up significantly, often surpassing 10m USD. For companies that raised Seed funding in the high-tide years between 2021 and 2023, the transition to Series A can be particularly tough, because expectations have changed.


“Seed rounds have now ballooned to sizes previously only seen at Series A.”

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3. Fundraising Takes Longer

‍The traditional advice for startups was to plan fundraising every 18-24 months. But as Carta's Head of Insights points out, this is no longer the case. Data from 2018 to 2021 may have validated this approach, but the median time between fundraising rounds has lengthened. In 2024, the average time between a Seed round and Series A has increased to 23 months (1.94 years), up from 18 months in previous years (e.g. 2019-2020). The lengthened fundraising timeline is pushing founders to stretch their capital further than ever before. The new rule of thumb is to raise enough capital to last 2.5 years at a minimum. This means focusing on burn efficiency and runway extension is key.

“Lengthened fundraising timelines are pushing founders to focus on burn efficiency and runway extension.”


4. Product Market Fit, Milestones and Metrics Matter More Than Ever

‍In today’s funding landscape, Series A investors are looking for startups that have not only reached key milestones but continue positive trends. Proven user growth, improving engagement metrics, and revenue are essential for Series A. Investors want to see evidence of customer adoption and market demand, not just potential. Let’s have a closer look at some key criteria:

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Product-Market Fit (PMF): Investors need to see clear evidence that your product meets market demand. At Series A, the question is no longer just "why you?" but "what have you achieved? Is product revenue growing with little to no marketing?“ Investors want to see that you have built an amazing product that people engage with. Identify signs of product-market fit early on, and consistently update investors on any progress, even in the initial stages A validated PMF is a dealmaking criterion.

Revenue Growth: Revenue growth has always been a prominent signal. And it will be. But the truth is that software companies that have achieved the previous era’s milestone, $1m or more in ARR, are now facing a challenging Series A market. Nowadays, investors see >2m USD ARR or more as the new baseline.

“The Series A round is like high school graduation. If you want to get into the best universities, you need good grades - and if you want to raise money for a Series A from serious VC investors you need substantial traction. A good network or previous success alone won’t do it anymore.” states Mickael Bellaiche, Partner at Redstone.

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And what we observed too is that capital efficiency is seen critical. Many investors also look at ARR per employee, which shows efficiency and is an even more powerful metric than just looking on ARR. As a rule of thumb, >100k ARR per employee for a late Seed company is perceived as normal these days.

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Unit Economics & Efficiency: Investors are no longer willing to back startups that burn cash at unsustainable rates. They are focused on unit economics - the efficiency with which a company can grow. The era of "growth at all costs" is over.

Thomas Molleker, investor at BMWi Ventures stresses “We are not looking for a secret KPI or a specific threshold for Series A readiness. What truly matters are efficiency and trends. For example, we are closely looking at customer cohorts - are you becoming more efficient quarter after quarter, and is there a clear path to positive payback after acquiring your existing customer base? Demonstrating strong trends indicates that your business is maturing and prepared to scale with additional funding.”

Now, gross margins above 80% (90% for software startups) and burn multiples (cash burned vs. revenue growth) below 2 are considered healthy; below 1.2 are considered great, with average 1.7 of Series A startups that successfully raised funding in 2023.

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Customer Validation & Business Model: A clear business model with the potential for scalability and profitability is key for raising Series A. For SaaS startups we have seen that metrics such as net dollar retention (NDR) rise in importance and are scrutinized by investors. It calculates the annual recurring revenue to include growth and customer churn. A NDR of above 90% for Seed and above 110% for Series A emerge as a new standard in SaaS. These act as a clear indicator of the startup's health and potential for growth.

“Series A investors are now closely looking at customer cohorts – and track whether startups are becoming more efficient quarter after quarter.”

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The Key Takeaway: A More Disciplined Approach to Series A

With these changes in mind, founders need to adapt their approach to fundraising. The world of zero-interest capital is long gone, and today’s investors are scrutinizing how you spend every dollar. Be prepared and articulate how each dollar will contribute to your growth story. Focus on building a sustainable business with strong unit economics. Show that your customer acquisition model is working efficiently and that your revenue streams are scalable.

If you’re preparing for a Series A round, here’s your action plan:
1. Build a robust narrative around your unit economics and demonstrate how you're improving them over time.
2. Focus on traction and ensure your customer acquisition is as efficient as possible.
3. Highlight your gross margins and net retention rates, showing that you are not only growing but also becoming more efficient as you scale.

By focusing on these core elements, you’ll be better positioned to secure that elusive Series A round, even in today’s challenging market.  
For founders, understanding these new dynamics is essential to navigating the Series A landscape and preparing for a successful round.

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‍Sources:

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