Creating a chart-topping hit single isn’t easy. It takes talent and drive and only a few make it. Achieving the top spot and increasing sales over the next 5 years, consistently, internationally and without relying on only one member of the band is an altogether different challenge. This is pop’s equivalent of Series B, and only a very small number get it right.
“Series B is hard for a simple reason: suspension of disbelief fades and is replaced by an increasingly cold, hard look at milestones and progress. Series B is the round where the rubber meets the road, where the promise has to be met with numbers and projections.” Fred Destin, investor at Accel
Series B is the round where metrics suddenly matter. You will have to show that you can grow up to become a real business that you have thought about and are delivering on and implementing on your Series A strategy. You will have to prove that the next phase of your business plan will materially drive growth.
Growth funds will typically invest in fewer companies than a seed fund but the size of each investment is much bigger. This changes your potential investor’s mindset. You will have to convince them that you and your business are worth backing based on what you have achieved so far as well as your plans for the future.
All this while still growing your business and meeting any day to day challenges. This puts incredible bandwidth strain on your management. In particular, if you have not had to worry too much about the metrics before. Now, you will need to understand the key metrics and optimise them to enable growth.
I suggest that there are five key areas a company needs to focus on getting right when raising a Series B, with apologies for showing my age with some explanatory pop analogies..
Sales Growth – Steve Brookstein or Take That?
Steve Brookstein was the first winner of X Factor in 2004, polling a huge six million votes - numbers that winners of the show today could only dream of. Not unreasonably, he thought he'd made it but later that year, Brookstein was dropped by his label. His name quickly became a byword for the pop phenomenon of the one-hit wonder.
Take That, on the other hand, have released hit single after hit single, creating a dedicated fan base who will always buy their records, good and bad. Their upcoming 30th anniversary reunion tour has already sold out.
Swap out “dedicated fan base” for “sticky revenue” and it becomes clearer why this matters. To raise a Series B, investors are looking for a repeatable and scalable business model. You now need to show that your revenue is what investors like to call ‘sticky’. This could be ‘recurring’ revenue. It could mean that you have low customer ‘churn’ or demonstrating that you have been able to ‘upsell’ higher value/more expensive products to your customers. Any of these is a sign of the desired stickiness.
Proving you know how to use the investment
You had that first hit, got famous and received your first royalties cheque. The question is what happened next? Did you party like it was 1999 or did you use your new-found influence to get the best producers to work on your next album?
By the time you get to Series B, you will have almost certainly received at least one previous round of investment. New investors will scrutinise how you used those funds. They want to know that their capital is in safe hands.
Achieving growth will be important but it isn’t everything. If you doubled annual recurring revenue (“ARR”) from £1m over a 2-year period, that’s great. But if you burned through £5m of investment in the same time, an investor will think twice about how financially responsible your management is.
International Expansion – World Domination
Surprisingly, in their first five years Take That failed to break into the US charts (until Back for Good was released in 1995). They thought or hoped that their local success would automatically flow internationally. Little Mix, another X factor product deliberately did a show in Japanese (click the link if you don’t believe me) with the sole aim of breaking into the Asian charts.
Showing that you can conquer your local market can only get you so far. At Series B, investors will assume that you have already capitalised on the low hanging fruit. What they are really looking for is evidence that you know where the next accessible market is and have credible plans to penetrate it. You must show the ability and drive to take your company successfully into new territories. This is key to delivering the returns investors are looking for.
Management – Are you built to last?
Bands that are all focussed around one personality or talent, don’t tend to last very long. Successful bands not only have a lead singer, but great musicians as well as a talented song writer. You need a solid foundation of talented individuals who are all excited about and committed to the cause.
The investor will be carefully considering the execution capabilities and quality of your management. You have the right plan and you’ve shown that they may tell you that “Yes, you have a plan,” or “You’ve proven that it’s an interesting market”, but do you actually have the right people to bring it home and to make it happen?
No investor will expect you to have an army of employees to get all the work done. They will, however, want to see that you have built a leadership team with talent and ability and that you have the potential to attract more talent in the future.
Model and the Metrics (No, not an obscure 90s electro-pop combo)
Series B investors are typically looking to triple their investment in 3-5 year time frame. To achieve this, they have to understand how easy it will be to scale up your business. The more you can help they do this, the easier it will be to raise the round. This means that you need to be fully on top of your data. Below are a few of the key inter-related metrics that investors will be expecting you to have to hand.
Some of the more important metrics are: What is the long term value of a client (Lifetime value); how much does it cost to acquire a new customer (Customer Acquisition Cost); and do you keep losing customers (Churn Rate).
A word of warning though, a business model is just a set of numbers if it isn’t supported by a reasoned and sensible business plan.
Hopefully my musing has explained why, although Series B is difficult to raise, focussing on and delivering in the right areas, will stand you in good stead so that you can ‘Pray’ for ‘The Greatest Day’ and eventually ‘Rule The World’!