Tracking Progress Through Matriculation
Early-stage venture capital is a funny business. VCs ask investors to fork over huge sums of money that they then throw (albeit in a methodological and educated manner) at promising young startups, hoping upon hope that they turn into very large and profitable businesses. The problem is, VCs have long realization horizons, with full fund performance in the balance until up to 10-plus years after making their first investment.
So how can a fund gauge its success along that long and highly unpredictable lifecycle? Looking at what your portfolio is “marked at” based on follow-on valuation rounds can be misleading. Companies that seem to be racing ahead and carrying the portfolio may fall flat on their face (Theranos, Jawbone and Fab.com spring to mind), while others that seem to be doing just fine can suddenly become your $10 billion stars. There are so many twists and turns in this business that commonly used metrics - like total value to paid-in (TVPI), which measures total value as a multiple of cost basis - are not really all that indicative of a fund’s progress, especially in the first few years of its life.
When we launched our first fund back in 2014, Brad and I wanted to focus on a different metric, one that would give our companies the best shot at success while also clearly demonstrating our overall progress and health of the fund. The metric we had in mind was Seed to Series A “graduation rate,” and it’s this idea that has ultimately become the bedrock of Primary’s strategy.
WHY IS SERIES A GRADUATION RATE SO IMPORTANT?
For starters, VC is a power law game. Generally speaking, the more stages of financing a company goes through, the greater its potential for a big outcome. But getting to the Series A is no joke. According to CB Insights, 70% of tech startups fail— usually around 20 months after raising their first financing, having closed an average of $1.3 million in total funding. Those that fail to raise the next round often shutter their doors or face an even worse fate: the dreaded zombie startup status.
As we began thinking more and more about these statistics, it became clear that to increase our companies’ potential for success - and therefore our own fund’s success - it was mission critical to do everything in our power to help them over the Series A hurdle. In contrast to the traditional VC approach of investing in many companies and hoping for several big winners (a risky bet, considering the odds of becoming a unicorn are less than 1%), we opted to invest in fewer companies so that we could take a very concentrated, hands-on approach to usher them to the A. If we got more of our companies to that milestone, the logic went, we would spin off more companies with a greater shot at success down the line.
And so we set out with the express purpose of maximizing our Series A graduation rate. That became our central tenet, the core DNA of our fund. To help us achieve that mission, we studied the specific pain points that make it so difficult for startups to raise an A round. These boiled down to the following:
- A weak foundational team
- Lack of focus, or focusing on the wrong thing
- Little early customer traction
We built our Platform Impact Team as a direct response to these particular needs, knowing that we wanted a robust group of experts on hand to partner with our companies and offer them tactical support right where they need it most. We created a best-in-class Talent Program - much more than your typical recruiting engine - which sees our team sit in-house with our companies to help them not only source A-plus candidates, but to coach them on the fundamentals of building a sustainable and scalable talent infrastructure. This includes working through complicated founder dynamics, and helping to create a cohesive company culture, compensation frameworks, organizational development and more. Our Strategic Finance division, meanwhile, partners with our companies to help them understand their key metrics and unit economics, and makes sure they are laser-focused on the numbers and deliverables they need to get to the Series A. And our Market Development Team is focused on helping our B2B companies establish client and partner relationships with relevant enterprise customers, which informs their go-to-market strategy.
These core capabilities, in addition to an in-house PR resource, hands-on fundraising help from our investment team and the invaluable operational guidance from our 200-plus-member Primary Expert Network have been instrumental in helping our portfolio companies navigate the inevitable hiccups of early startup days.
So how have these services played out in terms of graduation rate? To date, 15 of our 24 companies have reached the point of seeking a Series A financing, and 13 have succeeded in doing so, the majority of which were led by a new outside investor. In a world where industry norms for Series A graduation rate are at roughly 30%, we set our own internal benchmark at the best-in-class rate of 80%. We consistently strive to exceed that goal, and we’re pleased that our numbers to date indicate that we will land well north of that target.
As investors, we’re all hoping for those magical unicorns at the end of the rainbow. But for seed-stage VCs, that’s a long way off. It’s important, then, to focus on metrics that will give your LPs and the broader entrepreneurial community a sense of your ongoing progress and track record. For any founders looking to raise funds, I would encourage you to ask all prospective investors about their Series A graduation rate, and what strategies they have in place to help you get there.