A lot is said about the lack of funds invested in the series A and B in Latam but little about the implications to your financing strategy. Like many other subjects, it is treated as a broad issue that market forces will correct in time while founders in the field suffer the consequences. In developing ecosystems, the series A crunch feels more like a series A abysm. You would think founders, angel investors and seed funds would be much more paranoid about the next financing rounds. Unfortunately, they treat the present round as if it was the last. While it may be understandable, planning for the next rounds should be the highest of your priorities, right there with building your product and knowing your customer.
So if you are ready to partner with financial backers, take the following steps that may help you nail all your financing rounds.
First, choose angel investors with care. Beyond a personal fit and potential added value, you should prefer angels that have invested in companies backed by active VC funds. Institutional investors are finally taking note of the traction in angel investor’s portfolios in our market. If investors like Ariel Poler, Wences Casares or Murillo Tavares have bet on you, you will get the right introduction and great advice when negotiating a term sheet. Choose angel investors that have gone through the process or raising capital for several companies. Even better if funds had a great exit.
Then, take care of your cap table and corporate governance. We have let up opportunities to partner with fantastic founders because they did not own enough of their company. In Latam, you should try to reach your series A with the founding team owning around 70% of the equity after conversion of all notes outstanding. Below 30% in founders’ equity, you are not a viable startup in our book. Yielding special rights to your seed investors that give them control of your next round is also a bad idea. So when you negotiate a term sheet with your seed investor, be sure you are only protecting his investment.
Finally, engage your series A and B investors early. Founders should speak to series A funds while they are raising their seed round. Most active funds have gone through many investment processes and co-investments with the seed investors you are pitching to. Talking to series A funds allows you to get in on precious information about the Seed funds. Make sure your potential future partners would even consider partnering with them. Companies like Carrot, Clip, Cumplo or Kueski have been able to sustain outstanding traction during the past three years with successive rounds supported by a sound financing strategy and committed angels and VCs.
Most startups will fail to close a series A round. Some go bust because they did not build the right product or execute. Others, because of lack of planning and partnering with unexperienced investors. As much as it is hard to be picky when money is hard to find, closing a bad round should not be an option. It might be better to recognize failure early rather than structuring a bad seed round with the wrong partners.