December 5, 2012
Two Million to Series A

I’m seeing a trend in the early stage market where most teams end up
raising about $2M before going to market for their Series A.  If it
sounds high to you, you’re not alone.  In my head, it was closer to $1M.
 The actual data can be difficult to come by because much of this money
is raised as debt and not reported until the Series A.  So please take
this as anecdotal (for now).

Even more interesting than the amount is the fact that the approaches
to raising $2M vary widely.  Some teams do it in one shot, some over
two ($500k then $1.5M or $1M then $1M etc.) or even three rounds. Either
way, most end up around $2M and then either fold or move on to a
traditional $3-5M Series A.

So why $2M?

The cost of the best (non-founder) talent is pretty fixed in most of the
tech hubs at this point.  Given how tight the labor market is for
technical and design talent, building a world class team takes time and
money.  There’s also a minimum number of people required to produce a
great product at speed.

Shots on goal
Even the very best teams backed by the very best investors working in
the hottest space are wrong (gasp!). On $2M, it’s fair to say that you
should get two real shots at getting traction with a product (or two) IF
you are able to recognize the lack of interest early enough.  This
explains why some companies come back to market once or even twice
before their Series A round.

At $2M, you can build a robust syndicate that includes operator angels,
professional angels, micro VCs/seed funds and VCs. Having a diverse
syndicate gives founders an awesome base to build on. It also mitigates
the signaling risk. (By robust syndicate, I’m not advocating a party
round. They are distinct.)

Rules of thumb like this aren’t particularly useful on their own (and
there are many exceptions).  But they can help inform your fundraising
strategy and give you a starting point.  If you’re confused, you’re not
alone.  The early stage market is evolving quickly and there is no one
“right” path.  Know that it’s more art than science.

Dustin Dolginow is a Principal with Atlas Venture.  You can find this post, as well as additional content on his blog by clicking here.  You can also follow Dustin on Twitter (@dolginow) by clicking here.