Too many entrepreneurs fail to find their second round of financing
Entrepreneur, have you passed your A round and can you imagine yourself going on several other rounds to support your growth? Wait a bit before you rejoice. Both in the United States and in France, the statistics do not work in your favor. Thus, only one in two entrepreneurs will succeed in their second round of institutional financing. While most entrepreneurs fail for lack of traction, other pitfalls exist. I list here the elements necessary to optimize your chances of succeeding in a second round in good conditions:
The traction but above all the quality of it
The turnover must be multiplied by at least 2.5 from one year to the next. Prerequisite necessary but not sufficient. VCs place great importance on the drivers of this growth and are particularly sensitive to the following three points:
- Strong customer retention, or even a negative churn: There is no point in acquiring customers if they leave you quickly afterwards. Client retention is thus the first criterion that foreign investment funds consult after the growth rate. The pinnacle is even to have a negative churn, in other words to upsell existing customers! Tom Tunguz, VC in California, calculated that the customer upsell represents the main driver to obtain a strong valuation on SaaS subjects, even before the growth of turnover. (full article here).
- A controlled customer acquisition channel. The company has become an expert on an acquisition channel and has completely industrialized it. In parallel, conclusive tests were carried out on one or two other channels.
- An ability to sell without the founders. Especially true in B2B, investment funds will attach great importance to the fact that the signing of new clients no longer depends on the founders. The company has put together a team of independent salespeople who mostly achieve their goals.
In parallel with these points, the company has, of course, integrated effective KPI monitoring tools. The company understands these figures and understands its conversion funnel and the contribution of each marketing and sales action to the constitution of its turnover.
A larger market than expected
The company has proven that its addressable market is larger than the current perimeter, both geographically and functionally.
Geographically, the company has achieved a POC in a market like the UK or Germany. This demonstrates the suitability of the solution to the needs of foreign customers as well as the company’s ability to scale its international sales and to ensure the following (logistics, installation if necessary, after-sales service, etc. ).
Usually, start-ups offer a single product designed to tackle a niche (more or less extensive, of course). The VCs wait, during round B, for the company to be able to get out of its precinct by expanding the functionalities of its initial product. Enlargement can lead to upselling existing customers and / or reaching out to a different type of customer.
A complete team and no longer isolated entrepreneurs
Before its B turn, the company proved its ability to recruit a significant number of employees. Recruit but also integrate and retain the best over time. The company uses processes for scaling HR and has enlisted the services of one or two recruiters who know the company and its needs well.
The company has entrusted all of its key positions to experienced, autonomous and motivated directors. Without going so far as to systematically speak of a “star” (that is for the C towers), the directors manage the operations, allowing the company to emerge from total dependence on its founders. The latter will have to “market” this team to the investment funds of the second round. It is up to them to recruit them accordingly.
A round A in no way prefigures the success of a following round in view of the statistics available in France and the United States. In addition to significant traction, investment funds will be particularly attentive to the quality of traction, the company’s ability to expand its market (at product and geographic levels), not to mention the ability to attract and retain talent among its teams. In addition to these operational aspects, the quality of the funds entered during round A will also be important since signal theory is fully in play in the venture sector (see article on this subject here). In short, a B round owes nothing to chance.