Essential Strategies for Founders Seeking Series C Funding

Cathy Gao, a partner at Sapphire Ventures, points out that by 2025, startup founders will be contending with a challenging and somewhat paradoxical capital market. “Although funding is abundant, accessing it has become increasingly challenging,” she noted.

During her presentation at TechCrunch’s All Stage conference in July, Gao highlighted that those nearing their Series C are particularly skilled at navigating this distinctive economic environment. She emphasized the critical need for a reality check.

She observed that merely 20% of startups that obtain Series A funding advance to Series C. Over the last year, the requirements for securing late-stage funding have become more stringent, with investors prioritizing certainty over trending themes, Gao stated.

“Investors are now asking: ‘Is this company truly competitive in its market?’” Gao explained. “The focus has shifted from ‘Is this company growing?’ to ‘Is this company on a clear trajectory towards significant potential?’”

To secure Series C funding, startups must fulfill certain benchmarks. Gao highlighted the necessity of being leaders in their respective niche markets.

“These startups are carving out unique niches, leveraging targeted go-to-market strategies, and demonstrating robust demand,” she elaborated. “Essentially, they are scaling effectively, backed by compelling evidence that they are frontrunners in their domains.”

Founders targeting Series C funding need to recognize that metrics don’t always equate to capital. While indicators like metrics, annual returns, growth, and retention are vital, she cautioned that if investors doubt a company’s likelihood of success, they’ll seek alternatives.

“Investors must articulate the reasons a company will succeed in the future,” she asserted. Some companies, even with average metrics, still manage to garner significant Series C funding. For instance, one startup attained a valuation exceeding $2 billion by effectively showcasing its potential as a long-term leader, Gao noted.

Gao also pointed out that consistency is prioritized over short-lived moments of virality.

In today’s AI-driven landscape, companies are witnessing remarkable growth rates, she remarked. “However, what spikes quickly can also decline just as fast,” Gao cautioned. “Therefore, the critical question is: ‘Is this growth sustainable?’”

During a Series C round, investors look for “compounding loops,” which indicate that the company enhances as it scales, she suggested.

“Does your product improve with each new customer? Does your CAC [customer acquisition cost] adapt with additional users?” she asked.

If the answer is affirmative, investors are likely to “lean in,” Gao affirmed; otherwise, they may “lean out,” even if the metrics seem strong.

Finally, she advised founders to treat fundraising as a go-to-market strategy, stressing the importance of building relationships with VCs prior to seeking funding. Gao emphasized her firm’s tactic of investing at the Series B level, typically after nurturing a relationship with the company over time.

“In the Series A phase, even if we aren’t actively looking to invest, we prioritize cultivating a relationship with the company and its founder,” she mentioned. “We gather insights and develop a comprehensive understanding of the company’s journey.”

She also recommended that founders set up a “lightweight investor CRM” to manage connections with potential investors.

Founders should take notes during meetings with investors, just as investors do, she urged. They should record the names of investors, their interests, and recent investments, and also consider creating a distribution list for regular updates, as “this is an easy way to keep investors informed.”

Most importantly, Gao emphasized that any company aiming for Series C should not commence fundraising until they have indications of interest from multiple firms willing to support the round.

“Misjudging market timing is the last error you want to make,” she warned. Timing is crucial at the Series C stage. “It’s not just about pitching to 50 investors and hoping for one positive response. Success depends on strategic timing and careful planning,” she concluded.