The ULTIMATE Series A Fundraising Playbook | Christian Meermann from Cherry Ventures

Christian: [00:00:00] And that's one KPI that we as a firm measure closely. And, uh, obviously look at it, uh, because it shows us if we are successful as a seed stage investor, helping our companies to get to a very successful series, a, on the one hand, are you good at picking, uh, at the early stage? And then are you good in supporting your portfolio companies and the founders you partnered up with?

Christian: We sit together with the founders in a longer workshop. and discuss what are the metrics we should all be looking at at series A. And then we work backwards saying,

Rahul: Hey Christian. Thank you so much for joining me today.

Christian: Yeah. Thanks a lot, Rahul. Great to be here.

Rahul: Yeah. So, uh, is it true that you have like 75 percent of your portfolio companies graduating to series A fundraising?

Christian: Yeah, that is true. And that's one KPI that we as a firm,measure closely and obviously look at it because it [00:01:00] shows us if we are successful as a seed stage investor, helping our companies to get to a very successful series. A obviously this KPI has changed over time. if you look at the peak of the market in 2020, 21.

Christian: This was actually at a hundred percent. So every company managed to fundraise from someone, and it was very easy. now we're back to 75%, which I think is, it's much more healthy level and, and where it should be. And it's still far above average. yeah, but I think that's, that's the one KPI that we look at closely.

Rahul: So what is the average? Average is around anywhere between 10 to 20. I mean, from last I asked perplexity, it was anywhere, anywhere between 10 to 29

Rahul: Yeah. I think the, the, the industry average is, is pretty low.but you also have to see there's going to many companies that raise a tiny seed round and, but call it seed and then don't get to a, or they get [00:02:00] bought. on the way there.and also in the current market, when more companies are going out of business, that obviously drives down the industry average, which I think is between 20 and 30%.

Rahul: So why is your graduation rate so high? Is it because you pick great companies or Is it because of the support?

Christian: I would, uh, I would say it's both. I think if you want to look at it from a mathematical perspective, it's probably those two factors actually, that, that define a high graduation rate is on the one hand, are you good at picking,At the early stage and then are you good in supporting your portfolio companies and the founders you partnered up with and I'd say, you know, we're good.

Christian: It's kind of on the, on the picking side. We spend a lot of time with the founders before we decide, to partner up together. And then,I think that's also what we're going to talk a lot about today is. The, the partnering. So once we've decided to invest and work together, uh, and we have as entrepreneurs before seeing [00:03:00] how it is to scale a company and all our partners at Cherry have an entrepreneurial background and that does make a difference.

Christian: So we have been on the other side. We know how it is to scale a company. And we believe helping with our advice, in our portfolio that helps them raise a successful series a and get to the next level.

Rahul: Yeah. So, uh, between B2B and B, B2C, is there any difference in graduation? Which one is higher generally?

Christian: I would say it's roughly the same. It's just that generally at the moment, there are kind of less so for us as a firm, we are currently, I'd say 90 percent of the new investments that we make are in B2B, but then also the consumer ones that we do are very successful and raise the following round. I think the metrics that you follow on as a founder in consumer versus B2B are different and in consumer, it's more about scaling extremely fast, gaining market share very fast.[00:04:00]

Christian: Whereas it's in B2B, it's more about building the right product and then scaling it thoroughly.

Rahul: Yeah. Yeah. You mentioned, uhOne of the reason for this is also the support. So that's something that I really want to, understand more. Uh, because, you guys have a very structured playbook on how seed fund seed funded companies can get to series A. So starting with the benchmarks.

Rahul: Curious to know, like how, how you start off that, sort of relationship with your, portfolio companies. Yeah.

Christian: Yeah. So look, kind of for us as a, as a firm, like what is important is indeed this, the success from our seed portfolio to series A. And so therefore what we do after,all the paperwork is done for the investment, we sit together with the founders, in a longer workshop. And discuss what are the metrics, we should all be looking at, Series A.

Christian: And we go through kind of a big kind of [00:05:00] benchmark table on, you know, what is an okay result at, Series A at a certain KPI and what is a great result. And then we define together where should this company stand at Series A. And then we work backwards saying, okay, if you want to be, for example, at 2 million ARR at Series A.

Christian: Okay. Then that means after a year after our investment, and let's say you want to raise 18 months from now, you know, this is where you should be then after 12 months and where you should be after six months. And then you can work against this plan and that helps everyone involved.

Christian: So the founders, that helps also the whole team and the company and obviously, all investors to be fully aligned on what is the roadmap for the next 18 months.

Rahul: Okay, so when it comes to these benchmarks and KPIs, right? how did you guys develop this? This is only based on your own investment, data or is it also based on some external reports?

Christian: Yeah, no, that is a very big database. [00:06:00] So it's also based on, on, on external data. It's on our portfolio data. and then therefore we've defined like globally for B2B companies. What is, you know, the top, top 10%, what is the best kind of companies have seen in growth rate in, and our, our, in churn.

Christian: And therefore, for all, for every specific KPI, we've defined what we believe is the right benchmark, and then, we go through those numbers.

Rahul: So what are some critical ones?

Christian: Yeah,

Rahul: I think you guys always talk about repeatability. I'm very curious to, to know how you measure that. But yeah,

Christian: no, happy to. So maybe we start with an, not even, a pure number benchmark. because those are sometimes even harder to read. So the number one question is, is product market fit fully there. Um, so that needs to be visible. Uh, we, we get to that a bit in kind of what exactly that means, but, but that [00:07:00] is outside number one criteria to make sure the company can raise a good series, a Then I think another one is growth rates.

Christian: So ideally a company grows at a three X kind of year on year, because obviously the company is still at a small scale. So that should be doable. Then what is the absolute traction number? So it's a SAS business. It should be somewhere between one and 3 million ARR. Um, in terms of repeatability, what is it that we want to see is.

Christian: That is not just his founder who sold to his friends and family and a few people from the network and that worked well. But then what, what comes after that, right? So the CSA investor is going to say, yeah, show me that this is repeatable. Like has someone else sold the product than just the founder?

Christian: Have you experimented with growth channels? And I think that is extremely important that a founder can say, yeah, look, it was not just me selling to my own network, but it was other people selling. It was me selling to people. I didn't even know before that I did cold outreach too. [00:08:00] I think that is very important at CSA.

Rahul: yeah. I've worked in companies where most of those sales were like just network of founders and then in the end it blew up.

Christian: Yeah, I think it's obviously in the, in the early days, and especially if you have a product that is mostly for other tech companies, or that is, let's say the initial go to market. I mean, that's usually easiest because it's a shorter sales cycles. All these companies are fast and decision making, and I think it can always be a very good.

Christian: Yeah. Thanks. Initially go to market. But what we want to see is what comes beyond that. and it just can't be a network sales business. It needs to be through other channels as well to show scalability. And then obviously what is also important, and that is another proof point. Is the efficiency in this.

Christian: So what is your CAC payback? Um, which should be somewhere between look, three to six months in a good case can also be up to 12 months if it's more an enterprise [00:09:00] product. So depends on like, what's the ACV versus CAC. So that all plays a role here, but we want to see how efficient are you in scaling and, uh, can you then also with more money in the series, eh, Can you scale this to much bigger levels?

Rahul: Okay. do you guys also then maybe look at, the burn versus,

Christian: Yeah, we look at the burn multiples, so we don't want cash burn to be too high. Generally, um, it's in some companies, you obviously have to pre finance your customers. So if the sales cycle is long, that means you need to put more cash to work initially until you know, you get the payback from the customer.

Christian: Then the other question is, do customers pay. a big chunk of that yearly amount on day one, or do they pay in monthly rates or a half year or whatever, there's a lot to play around with. But generally, you want to make sure the burn multiple is healthy of a company. [00:10:00] And yeah, you don't just burn too much money and run out of cash very soon before you actually have fully proven product market fit and gotten to good traction.

Rahul: um, okay, sorry, what is burn multiple?

Christian: So burn multiple is the way we have defined it. And there's also other definitions from, from other investors, I would say, but we say it is dividing net cash burned by net new revenue generated over a certain period of time. I usually, you look at this on a, on a half year basis, um, and that KPI should be somewhere.

Christian: Between one and two X ideally.

Rahul: so let's say you made an investment, can you then walk me through like, how you sort of, uh, establish all these benchmarks with the portfolio, uh, team?

Rahul: Yeah. So I think kind of one, one very good example from our portfolio is a company called [00:11:00] Tecto. It's a Munich based procurement software company. We let their seed round. And then 18 months later, they raised their A from Sequoia. And then later on from, from index. And here, I think from kind of day one, we together defined the roadmap.

Rahul: So, you know, what are good metrics for the series A? And then in every board meeting, the founders have one slide, which is basically one big table of KPIs. So starting with a total ARR, then, uh, growth rates, pipeline growth, fully ramped up quarter carriers, not net dollar retention, ACV expansion, and so on and so on, and then scoring their performance versus the benchmarks.

Rahul: and we looked at this slide, every board meeting. And obviously,the more you are to the right side. So to the best result, um, the better, uh, and it was then very clear to see in every board meeting, okay, wow, we're already good on, let's say five dimensions, but here are two [00:12:00] where we need to work on.

Rahul: and what does that mean? So for example, if,You're not good at net dollar retention, then, you know, let's think about retention. Why are people churning? How can we upsell in the existing portfolio? And then you basically come up with conclusions or very clear measures to work on over the next three to six months.

Rahul: and that was actually a very constructive, iterative process to get the company to a very good state at, at series a, I'd say that

Rahul: Okay. Um, so while working with portfolio founders, right, has there been scenarios where, you've had difficulties, convincing founders, uh, to take some of these metrics seriously, or maybe, um, the way the founders interpreted of these benchmarks were maybe not right. Has there been scenarios like that?

Christian: definition of the benchmark is usually pretty, pretty clear. I think what, and the idea is usually when we develop this framework together on where the company stands, it's [00:13:00] individualized and tailor made to their company. So you actually do have mutual agreement on this is where we want to stand in 18 months.

Christian: So it's not the framework that we just. Put on the phone and say, Hey, this is where you need to be, but it's going to jointly develop. So we both agree on this is where we want to be. What can then happen is that a company figures out who I'm deviating quite a bit from my actually desired KPIs.

Christian: And if I look at my. Target metrics for after six months, I'm 30, 40 percent off, but that also then triggers a very good conversation. And the conversation can be, Hey, do we actually have product market fit? Do people really need the product or is our pricing actually right? Are we. Priced too highly.

Christian: And should we revise our pricing? So it leads actually to very good discussions to then figure out how do you need to adjust your kind of way of doing business and your operating model. And consequently, usually then also the targets, [00:14:00] because if you're 40 percent off, it's very hard to catch up on it.

Christian: But, the good thing is they always triggers the right, discussions, especially on the metrics that are off, right? So if if burn is completely off, then are you overstaffed? Are you not charging enough for the product? Why are revenues not ramping up fast enough? So it's, it's a good trigger point.

Rahul: Has any team refused to work with you, like in setting up these benchmarks?

Christian: No, not so far. It's also, we usually discuss this actually before, or like in the meetings before even our investment committee. And, you know, when you discuss how is it to work with Cherry, then obviously we say, Hey, we can, we have our playbooks with CSA, we're going to help you to raise the stellar CSA.

Christian: And that is how we usually do it. so everyone knows that this is coming and, and founders actually love it. And they want to. Get external benchmarks. They want to understand how do I get to a very good series a. And, and I think since it's an aligned [00:15:00] target that you work towards to it, it always works well.

Christian: So no one has ever refused to work with that.

Rahul: what are the gaps that you typically find when you start working? What are the areas that you typically go wrong? Like, I mean, so some, from what I've seen, I have not seen many companies, you know, not have a bridge round or anything like that before raising a CDP, at least in this part of the world. so. Where are the common gaps and where do things go wrong usually? Yeah.

Christian: I would say generally planning is always a little too optimistic. But I think that's also in every kind of founders DNA. I mean, you want to be successful. So you go for the home run and you're very confident, which is great. I think otherwise. You would have a much harder time fundraising and we want people that believe in what they're doing So I think that is it's actually [00:16:00] great to see but you you need to know.

Christian: Okay, even if they reach the best case Like it's or it is very unlikely that they're going to reach this so you rather discount the numbers by let's say 20 And then it's still an amazing outcome So I think that is I would say a common goal that everyone is a bit too confident in the initial planning phase So you got to adjust this a little bit to reality You I think then one gap is that people start to hire a little too late because um, you know, if you've come to seed stage, I think a lot has worked through founder hassle, through having a good network.

Christian: But then when it's about scaling this, you need to hire people, you need to split tasks. You need more people to do this. And some founders just start hiring a little too late and forget how long it takes to find the right candidates because it can take Up to six months to find the the perfect hire you want to make so you better start early And therefore if you start too late, you're also going to miss [00:17:00] kind of your your metrics um Yeah, but I think overall It's actually that the road map is usually pretty clear.

Christian: It also includes hiring and teams. So you roughly know Okay, I need three people in sales. I need 10 in engineering and then, you know, you prioritize that and, need to make time for it as a founder, because, I think hiring is extremely important, especially in the beginning because, you know, you as a founder are the one that sets the culture in the firm.

Christian: So you want to make sure your first hires are really good and are a great fit for the firm.

Rahul: I guess to summarize, all these metrics are essentially answering whether you have, uh, whether can you reach product market fit and whether, like you said, uh, can non founders sell this, um, and whether it's a repeatable process

Christian: Yeah. Mm

Rahul: right? So, so, maybe we can go through each one of them, starting

Rahul: with product fit,

Rahul: like how do you define product market [00:18:00] fit?

Christian: Yeah. So what we want to see with product market fit is like, is there a clear need for the product from customers? So do they really need it or is it just a nice to have, right? So, uh, you can also as some describe it as vitamin versus painkiller. So is the product really needed? And, um, also our customers, like what customer is going to miss the product, right?

Christian: If everyone says, Oh yeah, it's not a big deal. If the product is not around anymore, then that is a problem. I think, and then what are early signs to look at it? Because like at seed stage, you know, it's, the company is not around for long. So the way to measure this is our customers willing to pay for the product.

Christian: If you only have. unpaid customers, it's really hard to say, would they also pay 30, 40, 50 K a year for this product? So therefore it's important actually to, to charge early on. I think you can have the first two, three design customers, you know, maybe with a discounted rates. [00:19:00] I'd actually try to avoid too many free trials and pilots because it just takes a lot of time.

Christian: And also shows if people are willing to pay for it, it's also, they want to make it work as customers because they have an incentive for that. so I think that is one. And then the other question is, can also non founders sell this product? Because as a founder, obviously, you know, your product inside out could be.

Christian: You just promise way too much than the product actually can. But if you have other people selling it, it's actually a good test if it works, if they hit that need. And I think for the, then obviously in the due diligence we as seed investors, but also later on the A investors, they will do their DD on the customer side and they will ask, Hey, is this product generating any value for you?

Christian: Is it increasing your revenues or is it helping you on the cost side? Is it helping you on the compliance side? So. This product needs to fulfill a certain need. The bigger the need, the better, obviously. But if it's just a nice to have tool, that's usually not enough, because then people are not [00:20:00] willing to pay for it long term.

Rahul: I think usage is a very key thing here, right? Like, I, I used to sell a cybersecurity product. Um, and then the problem is we could get customers to pay for it, but then they don't use it throughout the year. So,

Christian: so then, then the renewal becomes a challenge. absolutely. So that's also why we look at engagement metrics, because there are obviously some products, That are not used on a daily basis because it's just simply the way it is But then what you want to see is how is engagement on a weekly basis on a monthly basis? Is that increasing within the company are more users?

Christian: Getting on board it and the ones that kind of, or your initial users, are they using the product more heavily, more often they spending more time on the product. I think that gives you a pretty good indication of kind of the relevance of the product and, and how it is expanding [00:21:00] within a company.

Rahul: And, and staying with the product market fit, right? Like, so, so, uh, I've read about your, Nascent product market fit and developing product market fit. What does that mean? I've never heard of this.

Christian: So look, I think the, what we see is there are different forms of, of, of product market fit. Right? So some companies also get there really fast, by a product that is very narrow. Right? So, and then you have a nascent product market fit. So, you know, there are a few customers that really need it.

Christian: But then the question is. Are there more customers for that? Right. So is the market actually much bigger? What we want to see is then after a year or so, is this kind of a much broader market that you can serve more and more customers willing to, to get your product. And how long does it take? If it takes you one and a half years to convince a customer on this product, who it's probably not really needed.

Christian: and I think you want to see a product that is [00:22:00] sold fairly quickly without too many interactions versus one that just drags out. And maybe you're just successful because you're very good in talking people into buying a product, but that is not scalable. So that's why we. Differentiate, um, between these two different forms of product market fit.

Christian: So we want to see the real long term product market fit and not just an initial one.

Rahul: Okay. So, but, but every company starts off with sort of a nascent product market fit when they, when they start off, right. When they have their initial few customers.

Rahul: So at what point do you, do you jump over to this, developing product market fit stage?

Christian: Yeah, like very quickly already when we invest we, we try to find out is this, you know, just a kind of narrow product for some customers. Um, can, can you actually scale the sales of this product? so it is important that is, you know, not an initial grade traction, which can sometimes happen.

Christian: Or if you have a product. [00:23:00] That has a big regulatory push. Now, let's say there's a new law that gets put into place January next year, and you have a product for that, then obviously you have a huge run on this product because you're only one out of three players offering this. But what happens on January 2nd, then everyone has the product.

Christian: Maybe you have a few late followers, but then it gets much, much harder to scale this. So that's why we want to see a repeatable Say it's motion, and the, and the proper product market fit.

Rahul: So what are the sort of questions, or things that you probe, the founding teams

Rahul: to ensure that they're on the path to product market fit?

Christian: Yeah. So I think kind of the, the initial question is what is your ICP? And we want to understand our founders selling to very clear customer profile in the beginning, rather narrow one, then just going to everyone they can find. And then can you need to adjust the product because this company is maybe is out of [00:24:00] your ICP because it's way too big.

Christian: It's actually an enterprise company and you're actually there to serve SMEs. The next company is maybe too small. So they can't actually really pay what you want them to pay. The next one needs a different feature that is very hard. So we want them to be very focused on one sector, one industry. On one specific group of companies in terms of size, to make sure sales motion really works in that bucket.

Christian: And then you can move on, you can move to other industries. You can move more towards enterprise scale, whatever. I think that's totally fine. But we want, want to see that you can really nail this in your ICP. I think that is super important.and then ideally you go to the industry that has the highest synergies as the next one, right?

Christian: So because some customers also have another business unit in that business, there can be a synergy. or that company has the same kind of regulatory motion that is being put in [00:25:00] place. Uh, there are different, kind of expansion causes, but we just want to make sure you follow to the one that is easiest for you given where you are today.

Rahul: okay, with sealed round, you need to prioritize really well, right? Like, so, so sometimes one issue that a lot of products have is that, okay, you might have a couple of customers and then they would want custom features and then you have to do custom build.stuff.

Rahul: So, uh, the prioritization, is that something that you look at? That is one thing. And also like, how do you assess defensibility? That's a second.

Christian: Yep. So I think on the, yeah, like on the first point, totally. I think you want to see a founding team that sells one product without offering in every sale. Oh yeah, sure. I'm going to build this feature for you and for the next customer. You, you promise them another feature that you're going to build in a year.

Christian: So that is not very scalable and gets you in a very tricky spot, at least after a year, [00:26:00] because then your customers figure out that you actually don't have all these features. and, and, and that just doesn't make any sense. So we want to see that you can sell one product. Obviously want to also see that the founders can dream about the future when the product is much bigger, has much more features and much more use cases.

Christian: I think that's amazing. We want to make sure you can sell the current product because otherwise it's, it's, it's not going to work then in terms of defensibility. Yeah, we want to see defensibility actually in the product because defensibility is not going to come from you're the best salesman and you're the fastest to sell it.

Christian: It needs to be embedded in the product and this can be. Because you have a great data set that you're building on because you get like interesting data from your customer that no one else has. Maybe you mix that with external data. You put an AI layer on top of it for you know, decision making suggestions, whatever.

Christian: But I think that is something that builds defensibility. [00:27:00] And we want to see something of that. Otherwise kind of everyone else can copy your business, raise more funding. I'll perform you maybe in sales. And then you have an issue. So we want to see real, real modes in this business. that is usually within the company and in most cases, either comes from a very complex software that you've built or from a very strong database that you've built up.

Rahul: so I know a lot of, companies cannot replace a lot of these, enterprise software because of the data mode, like, but, uh, as a startup, like, how do you get access to it?

Christian: Yeah. I think, yeah, an enterprise, first of all, it's harder than an SME. I think an SME, it's always a bit easier because the market is moving faster, so you can do more. look, the way we look at this is. I think in today's market, there's lots of external data available that you can get, uh, plus Through recent developments in AI, actually, you [00:28:00] can do very interesting stuff with this external data, plus kind of the internal data you get from your customer.

Christian: And then maybe also from other customers that you can use. And I think that makes it very interesting. Whereas the incumbents are probably a little bit slower, maybe they don't integrate so much external data. They are probably still very much in a silo mode. So they have the data for one customer. They work with that.

Christian: rather than working with a bigger data set from all other customers they have. So I think that is your advantage that you can create much more with the more data you have and being more agile than an incumbent.

Christian: And, um, you briefly talked about, uh, the ICP and,stuff like that. Um, but like, what are the sort of, principles on like creating, uh, a great, GTM strategy? Yeah, look, I think what we want to see on, on go to market is first of all, like a very clear current product and a product [00:29:00] vision. So, you know, this is the product now, this is where it's going to be. So that's very clear for the customer. Like what is he or she buying today? And what can this also do in the future?

Christian: And, and I think most importantly, what's the value add for that customer, right? So. Just a nice software to make your workflow a little bit easier. That's usually not enough. So if kind of the main value you bring is cost savings, I think you need to make, make a very clear case. Okay. This is a sample customer where we save that customer half a million or a million and spend each year.

Christian: I think that is important and that helps you a lot. If it's a tool that goes more to the revenue optimization, you ideally, you can show, Hey, with this other customer, we increase their revenue by 10 percent just by using our tool. So it's an amazing product to use. I think that is extremely important.

Christian: That's the founders can pitch that product well, and also that others can pitch their product well. To their potential customers. And what we want to see in, in go to market [00:30:00] is that there's a clear kind of growth channel view. So what are other growth growth channels? Where do you get your leads from?

Christian: What are the best sources? How big are these sources actually? So are you done after half a year? And then every potential customer in your market, you have already reached out to, or are there other pools of leads and how can you, Access them in the most efficient way, and this can be all different types of growth channels.

Christian: There's no right or wrong for some products Webinars work amazingly well for others. It's just cold outreach via linkedin For others, it's if it's more enterprise, it's trade fairs So you have to figure out like what is it that works best for your product? There's no Kind of right or wrong. You need to figure it out, uh, give it a personal spin of kind of what works best.

Christian: And then, you know, ideally you find those two or three channels that are working really well for you. And then you double down on it. You put [00:31:00] more money behind it, more resources behind it and scale through these channels.

Rahul: And, um, what are some of the metrics to track, to see things are working or not

Christian: Yeah. So I'd say in go to market, I mean, the, the obvious one is, is growth, right? Right. So are you growing, are you getting to at least three X, growth year on year? If you're only growing like at your early stage, if you're only growing 50-60 percent year on year, You probably haven't figured out like what's the best kind of growth channel, or what is, or have you built the product the right way that people really want to have it?

Christian: So I think growth is probably the best indicator for it. Engagement in the product is important to make sure people are really using it and are not just buying it and then they drop out after a year. Obviously net, uh, net dollar retention is important. So are people expanding with a product? If that is above 130%, [00:32:00] amazing.

Christian: Uh, if that's below 100%, you have a problem. So I think those are KPIs to look at. they actually give you a good, a good indicator.

Rahul: And, you mentioned, you need to be very clear on, whether your product is either saving the company or maybe revenue optimization and things like that. So, okay. Let's say you're saving the company half a million dollars. How do you then price your product?

Christian: Yeah. So, yeah, in the end it's I would say early stage pricing. Is, uh, rather an art than a science, right? So, because theoretically you could say, I say, if you have a million, so pay me half a million, because in year two, you know, uh, it's already amazing deal for you as my customer. I think that doesn't usually work because initially it's also about kind of, you know, getting traction, getting first customers on board, sometimes making a compromise.

Christian: So I would price it in a way, like look at similar tools. It's that add similar value. [00:33:00] So for example, if you, I mean, if you really save half a million, you can also easily charge a hundred K a year for this, right? I think that is pretty clear. Um, but I think in the early days, I would make sure to get in, into the customer to prove the value, because usually you've proven that value with another customer, so there's still a little bit of the question, does it also work with me as a new customer?

Christian: So prove that. And then I think grow from there. Generally, I would say most founders are, not aggressive enough on pricing. especially in consumer, everyone thinks, Oh, if I raise my prices, every customer is going to go away. Turns out actually in almost all companies in our portfolio, you could raise prices by 10 or 20 percent without any kind of customer dropping.

Christian: So I think in B2B, you need to be a little bit more cautious because if you have one big client, you increase the price too much and the client drops. That hurts. but once you're a little bit bigger, I'd really recommend to, to [00:34:00] experiment on pricing and see how far you can get, and usually you're pretty surprised, um, how much, you can go up with your price.

Rahul: Yeah. And especially if you develop some data mode or some sort of dependability, Then you can, you have more leverage. yeah. So, so what is your opinion on like giving out maybe free features or things like that as a trade off for receiving data or understanding work workflows?

Christian: Yeah, look, I'd say first of all, it's important that you that you gain traction, huh? So therefore I think Do whatever it takes to get there. The only thing is if you give out the product for free You the problem is you miss the real proof of product market Fit You don't know if they would actually also buy it if it was 50 K a year.

Christian: Therefore, I'm not the biggest fan of kind of giving out the product for free. I wouldn't do too many free [00:35:00] trials. I think in the very, very beginning. So pre seed stage, you need three, four design customers. Yeah, whatever. Do it for free. Ideally you charge a bit for it. Um, but then I would quickly get to a point where you charge and then you see if it's working and if that is scalable, there's some customers, some companies that need to build out kind of this database first.

Christian: Where actually it's more about getting this data initially and less on monetization that can also work. And then you charge later on, but it can be a quick excuse for founders to say, no, no, no. I need to get these customers to get the data, to get better. And then I start charging in three years, but then in three years, you probably have run out of money.

Christian: So Therefore, we actually encourage everyone to start charging early and see how our customers pay for it. And if, if your product adds value to the customers, why would they not pay for it?

Rahul: earlier on you mentioned that, one of the mistakes that you see a lot of founding team make is that, they, [00:36:00] they leave it too late to hire, So, curious to know, like what, like what is the sort of composition, um how important is the team, uh, in, in getting a startup from seed to CDA?

Christian: Yeah. So I think at our stage, when we invest, um, so early stage seed, I think team is, is extremely important. So we want to see a complimentary team ideally. Yeah. So one founder, very strong on the commercial side, one founder, very strong on the technical side. We then have a third one, who's extremely strong, um, and products amazing.

Christian: I think it also works if you have two founders, but you know, that would be kind of the, the perfect setup. And then once you go over to series a, I think you want to see kind of that this team can hire and attract top talent. So can they hire a top C level with AAA candidates? Can they attract [00:37:00] them?

Christian: Get them on boards, get them equally excited about the company, about the product, about what they're building. So this is also then what's use a investors look at. So is it just the two founders or have they actually built a proper company and, and the very good senior level to then scale it from a to series B.

Christian: So this actually becomes pretty important. It depends a bit on, you know, where do you start off and then where are your strength at seed and what do you need to add, usually you need to To have someone who does finance for you. So it shouldn't be the founders still doing kind of the financial side, sending around the monthly report, all of that.

Christian: So ideally you're higher kind of a VP finance or CFO depends on, on kind of the seniority of that person. So just to, to take away that burden. then I think many founders hire founders associates who can take over a bunch of tasks. That usually works well. And then obviously kind of, you know, you need a very [00:38:00] strong engineering team, ideally a very good VP engineering that you have already, or at least a very clear candidate that you, that you would then hire after the series.

Christian: Hey, I think that's kind of what it's series a investors want to see.

Rahul: So what does the team size and all look like it seed and how does that transform in series a,

Rahul: yeah, I would say I'm at seed. It's usually between five and 10 people. And then, at Series A, I would say it's between 20 and 30. if it's B2B and consumer companies, it can be more. But, I think that is also usually a good size. And so I think, because as I mentioned, the burn multiple needs to be in line.

Christian: If you have more than 30 people that gets already pretty tight. so if it's like 20 to 30 people at CSI, that is actually a good, a good size.

Rahul: and the split, among sort of maybe product and distribution

Rahul: obviously always depends a [00:39:00] little bit on, you know, how like how thick is the product you're building? How complex is it? But I would say ideally it's like two thirds, two thirds on the kind of on the product tech side and one third on the commercial side. But we've also seen 50 50.

Christian: I'd say that is roughly the range we're seeing.

Rahul: and, the team's ability to hire the AAA talent that you talked about, like,

Rahul: how do you judge that?

Christian: Yeah. I think the. The good thing is as an investor, you also usually touch base with the rest of the team. So when there's a board meeting, you know, some of them come in and present some parts and then there's usually a board dinner or lunch afterwards where you get to meet them. So that's always a good thing.

Christian: Point then also, when the team is recruiting, we usually help in interviewing the, the top talent. So we're usually involved, and get our own view on, you know, on the candidates, and I think that [00:40:00] gives us a good view then for the series a investor that then looks at the company. They do the same.

Christian: They interview, um, the C level and, and form their view afterwards. If they feel, okay, wow, those are really top, top caliber that they attracted, or if they feel they could do better, I think they're, they're also very good in assessing that.

Rahul: And another thing, is the finances, right? at the beginning, we talked about burn multiples and things like that. so what are the metrics, maybe, that the teams don't look at? really closely, in your opinion or in your

Rahul: experience.

Christian: So I think the biggest mistake is if you only look at growth rates and if that growth rate is not even based on revenues, but on like user numbers, that leads to completely unaligned incentives because if then in the firm, you tell your whole team, Hey, it's all about user growth.

Christian: Then, you know, they [00:41:00] get a bunch of users in that are not paying for it. that are just there maybe to try it out on day one and then they all drop. So I think it's important that kind of, you look on real growth as revenue growth, and then that you don't forget to look at the efficiency of that, right?

Christian: So if, if kind of that revenue growth comes at a massive cost, you probably haven't really figured out a great go to market motion. So we want to see that you scale nicely with a moderate burn. If you look at absolute numbers, I would say. If a company gets to series a and let's say there are then that's two to three million ar Ideally, they're not burning much more than 200 to 300k a month If it's more than that It's actually either the team is very overstaffed or You know, maybe the product is not there yet and they need to kind of hire many more people to fix issues So But ideally, like [00:42:00] it's, it's healthy if you're then at like 200 K burn, I think then you're in a, in a pretty good spot.

Rahul: Yeah. and and when you raise a seed, usually you raise for 18 to 24 months, right? Like,

Rahul: so, and, and we discussed now a little bit product, a GTM, hiring the team finances. so if you were to put this on like a timeline, okay. At the nine months or 12 months. period, time period of what, where should the product be?

Rahul: And then we, maybe we can discuss all the other

Christian: Yeah. Yeah. So look, I think, starting from product, I think if after the, let's assume there's a company that has raised a pre seed round from angels comes to us raises, let's say a 4 million seed round. So, you know, it has actually quite some money in the bank, to then build out the product further and, and, and show initial traction.

Christian: So ideally then after a year, this [00:43:00] product is working properly, right? So customers use it on a daily or weekly basis. They love it. They feel like, yeah, they're like, we'd love this feature at some point. And we feel, Hey, this could be built out further, but it's going to, the current product actually serves them already quite well.

Christian: On what they need. So I think that is what you want to see on the product. and that this like that you can sell it fairly easily and also onboarding, uh, with a product works easily so that you don't need lots of manual effort in onboarding the customer and do lots of handholding, migrate that data and spend a lot of time with them ideally.

Christian: All of this works almost automatically. I don't want to say self onboarding because it's, that's what everyone wishes, but it's, it's usually not that easy, but you want seamless onboarding and, and I think then you're in a pretty good spot on the, on the product side, if you look at the kind of monetary side after a year, and let's say you want to raise.

Christian: In 18 months i'd say ideally [00:44:00] you are it's a million ar or close to it and you got there by growing 3x and I think if you then grow another 3x from there you'd be at You know at a very healthy Top line traction, when you, when you raise your series a

Rahul: But, at what point do you start planning? Because you need at least six months, right. runway sort of thing. So you start planning for the series. A. The beginning of 12 months or

Christian: yeah, I'd say so. So after a year is usually the good. So the, like when we invest and make this plan ideas to have 24 months of run rate. So two years to raise ideally after one and a half years. And then after a year, that's when you say, okay. Numbers look good. Let's prep for the fundraise because also, you know, you need to prepare your materials, have all your core data, right?

Christian: And all of that, which takes a little bit of time. And this is usually also [00:45:00] just held with 2, 3 people in the company. So that's why. It's still lots of found the work that goes into the preparation of the series. So it's not that you have a CFO has done this already 5 times and you just hand it over.

Christian: It's not at that stage yet. So you have to do it yourself. You craft the equity story, you know, what is it that I'm going to pitch this year's a investor. And I think once you have that clear, you execute probably another three months towards your plan and then you go out and ideally, then it's a, it's a two month process to define, you know, who's, who's the lead you want to go with, and then maybe another four weeks to, to close the, the route.

Rahul: what if things are not going well at 12 months?

Christian: Yeah, good point. That can obviously happen. I think then most important is. To be very honest and transparent kind of with everyone around the table and figure out okay Why is it not working right because it's it's evident if you're not at a millionaire are but you are [00:46:00] at 500k Then you know, it's a fairly big gap.

Christian: And the question is why is there a gap? This could be because sales cycles are much much longer Or Because there is suddenly a big competitor that came in half their prices, which is an issue for you. So I think then we want to have the right discussion about it. And I think it's also, I think all founders are actually very transparent in these phases because it doesn't help you.

Christian: To come up with excuses and say, yeah, look, it's just like it's recession and macro is difficult and all of that, or seasonality. I think if you're a startup. seed Series A stage seasonality. It shouldn't really matter for you. You should outgrow. Seasonality because you're young, your numbers are still small.

Christian: So you should be able to still to close customers, in, in a more tricky period of time and then, yeah, we sit together, figure out what is [00:47:00] needed. Do you need to tweak the product a little bit is maybe your ICP. Not really wanting the product. You need to go to a different target group. Sometimes founders discovered, Hey, maybe this initial kind of market is actually not the best, or I want to go more enterprise, or I want to go to this different industry.

Christian: They seem to need it more. Totally fine. I think you need to cross correct. I think worst cases founders just stay on their lane all the time until they run out of money. I think that's the worst to do. So, and we see top founders. I think pivoting is always a hard word because it means you're doing something completely different.

Christian: It doesn't need to be the case in all these scenarios, but it can be, Hey, I flip around my product because I feel this is much easier than to sell. Or I slightly change my ICP and it's much easier to do. Totally fine. We want to see this agility and dynamic behavior because it doesn't help anyone if you've executed, stayed always on the same path and not [00:48:00] deviated a little bit to left and right.

Christian: But then you run out of money with horrible numbers.

Rahul: Yeah. so when it comes to your own portfolio, how often do you have these conversations? Like maybe with what percentage of your portfolio companies?

Christian: I think, look, from the outside, it always, if you look then at the bigger companies, it always looks like, wow, everything went amazingly well with this company and it was always up and to the right and, and never anything happened. I think the reality is also from being an entrepreneur myself.

Christian: I think every company goes through very, very hard times on their journey.when it's about. Wow. We only have very little cash left. we need to act immediately or suddenly growth stopped. we need to change something on our go to market or even worst case on our cost side.

Christian: So I think it actually happens very frequently that, you know, there's something you [00:49:00] need to adjust to. So that I would say we probably even seen 80 percent of the companies and also in the ones that are now multi billion dollar companies, it's never a straight line. and I think good entrepreneurs need to weather those storms and, and be quick and, and adjust to, to new situations.

Rahul: so the couple of things that we've not talked about in terms of timeline is like, at the end of a year, what is sort of, the GTM and, maybe the team composition looks like,

Christian: So ideally by then it's not just the founder selling the product, but it's, um, it's ideally a team of two to three, AEs kind of that are selling the product. And ideally, let's say if you have three, two of them already ramped up, maybe one already fully ramped up the second one in the middle and the third one maybe just started, but you want to see.

Christian: How does the ramp up curve look like? Can other people sell this product? I think that is clearly what you wanna see. And then on a bit [00:50:00] more kind of top of funnel, it depends a little bit on the business, but ideally you see, uh, kind of a, a marketing team that helps you generate leads. and yeah, so there you have a proper kinda sales engine up and running and that is not just gonna one founder selling the product.

Christian: That is just not, not enough.

Rahul: and this is at, one year period.

Christian: Yeah,

Rahul: Right. Okay. Okay. Okay. So, you have a plan with a lot of metrics. And somehow the company is hitting all these metrics. but you also need to still tell your story, right. to, to raise the next round of funding. so how, how do you guys help with that?

Rahul: And, what does that process like?

Christian: Yeah. Yeah. Look, this is super important, right? So when the founder raises the series a, it still relies a lot on the founder. Um, and, and I think therefore the equity story needs to be very good. Obviously you can have your [00:51:00] numbers speak for themselves. So I think that is, that is clear.

Christian: But I think you need to be very good in articulating an exciting story, why the next investor should invest into this company. Because every investor at series A stage, also at seed, I mean, sees so many companies and there's only very, very few that they pick in the end. So you want to make sure you're very good in, in articulating your vision and why this becomes a billion dollar company.

Christian: I think generally, US founders are stronger in this dimension than European ones. I think European ones are usually very humble and, and, and, you know, don't like to pitch the big vision because they're not there yet. But I think it's important to show the potential of the company. And I think the story needs to be very crisp.

Christian: Like what's the, why now, you know, what, what happened in the market that this is now a great opportunity. What are you building? Who's your target customer? What's your traction, something like, Hey, I got from zero revenues to 2 million AR in the last 18 [00:52:00] months. We're growing fast. Our pipeline is massively filled.

Christian: It's a blue ocean market. It's X billion dollar big. and, and it's projected to grow another 30 percent year on year. So, you know, we are there to win first kind of the, the market in our country and then later on globally. And I think that is. What investors want to see, um, from this team.

Christian: And I think that is extremely, extremely important.

Rahul: what do you think is the most important thing when it comes to telling a story? What, what sort of framing, works the best? Maybe what is the factor that will really push the investor to say yes?

Christian: Look, I think it's obviously can numbers don't lie, right? If you have outstanding metrics, that is the best basis you can ever have. Right? So ideally. on, on this KPI metrics, you outperform in 70, 80 percent of the KPIs, right? So that, that makes you already a top decile [00:53:00] company of your cohort, right?

Christian: So huge advantage. And I think then it's about articulating, how do you get from here with excellent metrics to the next level and to the one after that? And why is that an exciting space? In which the next multi billion dollar company is built in. I think that is what you need to convey.

Christian: And, and that is what then gets funds over the line. Obviously one secret, like if you have more than one term sheet, it helps. Right. So if you can say, Hey, you know, I have excellent numbers and a great story and already two term sheets. Everyone moves a little bit faster. Uh, I think getting this first term sheet makes a big difference in your fundraising trajectory.

Rahul: Yeah. I think that's the only thing to speed up the things. If you have multiple term sheet, yeah, you have

Rahul: negotiation. Otherwise the opposite party has a negotiation.

Christian: Yeah. And I think on the other hand, as a founder, also don't overplay [00:54:00] your hand. Right. So we've seen founders telling funds, yeah, I already have term sheets and they didn't have one. And, and you know, that always comes out and then it bites you. Right. So, I think there, you need to be very careful, like always stay to the truth.

Christian: I think there's nothing going to win in winning it by overplaying your hand. And, and also if you say, Hey, I have a super high. valuation from fund X and you've named that fund. I mean, you know, it's super easy for every fund to figure out if that is true because everyone knows each other in our industry.

Christian: So don't underestimate that fact.

Christian: Yeah. you said numbers don't lie. So what does really good numbers look like? just to summarize,Yeah. Yeah. Look, so I'd say for, um, you know, for, uh, for a stellar B2B company at Sears, uh, Sears HGH. So I'd say, ARR traction around 3 million. really, really good. your upper end, I think growth [00:55:00] more than three X year and year. Perfect. Late stage pipeline growth. And so investors are definitely going to look at your pipeline.

Christian: so can you sustain that growth or is everything going to collapse after the investment? So ideally you can show that you have. Massively increase the pipeline and that you have found kind of a motion to continuously increase your pipeline also by three X fully ramped up quarter carriers. And so do you have people in the sales team that can sell this product going forward?

Christian: Ideally also more than three people, net dollar retention, I would say.

Rahul: do you mean by fully quota carrying a he's?

Christian: Ah, so that means kind of sales people that kind of fully fulfilled their sales quota. So they say it's target. For example, if it's a, if it's SME SaaS tool, let's say you charge 30, 40, 50 K for that product a year, and that salesperson should make a target of 700 K a year. [00:56:00] Right. And, and we want to see that you have three of those that already at their target or on their way to that target.

Christian: So you have a good feeling of, Hey, wow, this is really repeatable. And if I hired 10 more of them, I'm going to add 10 times 700 K a year. ARR, right? So which then gets very juicy numbers. And I think that is what you want to see at Series A. Then, net dollar retention, obviously important. Um, I think there at Series A, I'd say everything above 140 percent is really, really good.

Christian: We've seen companies with 200%, but that is really, really the exception. ACV expansion. Can you expand ACVs over time? Ideally, you can expand them by more than 50%. That's amazing. Repeatability strong. Can you repeat your sales process? Great. CAC payback. We talked about this beforehand. Ideally, zero to six months.

Christian: You're absolutely top quartile. Burn multiple [00:57:00] we discussed somewhere at around like one, one to two unit economics. Yeah. I mean, if it's a software product, you usually do have good margins, but they need to be high important. not the case for some of the AI companies. So that's you know, why you've got to work on this, margin story and make sure if you don't have good unit economics now, what's the clear path to very good unit economics and then product market fit.

Christian: But I think product market fit is then demonstrated by all of these KPIs. And look, if, if you now go through all of these KPIs. Chances are close to zero that you you know, you're excelling in all of these dimensions. It's not going to happen. but look, if you're very good in 80 percent of those cases, you're going to have a very good time fundraising a series.

Rahul: That's a good note to end. Yeah. Christian, this is great. thank you so much for taking the time to do this.

Christian: Yeah. Thanks so much. It was a lot of fun.