Raising a Series A for your DevTools Startup
Five metrics early-stage investors will focus on during your pitch.
This post originally appeared on TechCrunch+, but I got loads of requests to open-source the piece. If you recently raised an A, I’d love to learn what you think worked for you!
A year ago, developer-focused software companies were getting funded at huge valuations, buoyed by the prospect of blockbuster IPOs like those from Snowflake, HashiCorp, and Confluent. Now, with the market downturn, raising capital for a dev-tools startup is much more difficult. But it’s not impossible.
After meeting hundreds of developer tools startups over the last several months, and talking to dozens of fellow investors, I see one common characteristic among founders who have raised successful Series A rounds: they’re great at telling their companies’ stories. Of course, it takes more than a way with words to raise capital, and in this article, I’ll delve into a practical, step-by-step guide founders can use to move successfully from Seed to Series A.
Before we get started, it’s important to set expectations. Series A prices for dev-tools companies (and many other sectors) are seeing significant regression to the mean, with valuations down across the board. The median series A round in Q3 2022 for a developer tooling company closed at $47.5m, the lowest it has been since the beginning of 2021.
Source: PitchBook
Seed rounds are raised to validate a problem and create an early solution. Series A rounds are used to bring a solution to market, get a few customers to care, and see early signs of monetizing that solution. As an investor in many iconic developers-first businesses, including Docker, Redis, and Startree, these six metrics are what I look for.
User growth
The most important metric VCs want to see is non-linear organic growth in your product’s user base, including usage expansion within specific teams. Try to provide at least a month of weekly and/or daily data. If you’re running an open-source company and user count is thus hard to instrument, instead show usage growth through proxies like downloads or in-product engagement. And, remember, not all users are created equal. A company looks stronger if its users are from modern, engineering-first companies such as Robinhood, Confluent, Databricks, and Airbnb.
Revenue
Revenue is taking an increasingly important role in Series A fundraising conversations. It’s not actually the amount of revenue that matters, it’s the quality. You could raise a stellar series A at $100K, $500k, or $5M ARR. Investors point to current revenue as a leading indicator of what revenue could look like as your company grows.
I wouldn’t recommend sacrificing free user growth to chase low-quality revenue. Examples of low-quality revenue might be customers who want you to build one-off features for them, services revenue you generate from proof-of-concept conversations, or kick-backs from channel partnerships. High-quality revenue is generated directly from your customer base in exchange for usage of your product.
Without revenue, you can demonstrate willingness to pay with qualitative evidence from developers that illustrates their plans to expand product usage. It’s common to ask design partners to sign letters of intent (LOIs) that they will convert at a certain date for a certain price after some milestone.
Quality of usage
To raise a Series A today, you won’t just have to show investors that developers are using your product, but that they are doing so in realistic production settings to get real work done. Don’t get me wrong, as an engineer at heart, I spend many hours playing around with different tools. Some of the most iconic developer-first companies, like Heroku, were started by catering to hobbyists. This audience is an excellent top-of-funnel, but Series A investors want to see early signs that your product is valuable enough to be deployed in production environments or workflows. A good rule of thumb to ensure usage is high quality is that you’d be proud to publish a case study about it on your website.
Include quotes or statistics from high-quality users in your pitch deck. The first thing a potential investor will do is call each user listed in your deck, so make sure the ones you list are representative of the true value your product is providing.
Community metrics
The best software platforms cultivate movements behind them, like data transformation company dbt with over 35,000 members in its Slack community. Developers are in the driver’s seat at most tech-first companies, and capturing their imagination will dramatically increase your GTM efficiency. If your product makes a legitimate difference in the lives of developers, they will talk about your company with their friends, colleagues, and managers, sparking virality. Here are some ways to show investors that you have an engaged audience that will soon generate value:
Share product content on Hacker News, Twitter, and other blogs. If they perform well, share your content metrics (views, trials, first-time visitors, etc) with investors.
For open-source products, show contributor and pull-request (PR) growth over time. Git Pulse is an excellent tool you can use to visualize your project’s trajectory. Stars are gamable and not indicative of product market fit, but they do add to a healthy growth narrative..
Show Slack/Discord metrics such as growth trends in weekly active users, total users, and messages sent.
Display a “wall of love” on your website. This is a collection of tweets and other content your users have created about your product. Railway has done a fantastic job of this.
Large markets
Because public company valuations have been reset, investors now believe total addressable markets (TAMs) are lower than they previously imagined. For this reason, you will now need to show that you can appeal to more potential personas, or that you can charge much more per user, or that some macro-trend is growing your target persona or their demand. Show that you appeal to more personas by expanding across teams. Maybe your database tool could one day be used as a caching layer, or your data exploration tool could appeal to data and financial analysts.
You can also show that your users will pay more for your tools in the future if they are demanding additional high-value enterprise features. This demand shows investors that you can generate larger annual contract values (ACVs) from each customer once you’ve raised the funding to build these features.
Lastly, you can show that your user base is seemingly small now, but will grow rapidly due to certain industry advancements.
A Great Story
Nailing your story is almost as important as demonstrating the above benchmarks, but it’s easier said than done. A compelling Series A story has three core components: the trends obviating the need for your product, your team’s fitness to tackle this problem, and the reasons you believe your solution is the correct approach.
Start with specific trends you’re seeing in the market. What about the world is changing? What about that change is mandating your company and setting it up to succeed?
Here’s a bad example: The world is moving to the cloud! That means developers need our microservice orchestration solution!
Here’s a good example: As part of the shift to the cloud, microservices and event-driven architectures are now the design preference of every engineer. Our microservice orchestration platform accelerates companies’ transition to event-driven architecture and helps them scale with it.
Next, now that you’ve spelled out what about the world is forcing your product into existence, explain why you and your team are the right people to solve this issue.
Here’s a bad example: We worked at Airbnb and have been interested in this problem for a long time and finally decided to start a company because we always wanted to be entrepreneurs.
Here’s a good example: We saw this problem first-hand at Airbnb, where we spent a crippling amount of time working on making this architecture work, even though our team charter was something else. After testing several possible solutions with our engineering friends at companies like Doordash and Uber, we realized OurProduct was scalable and generalizable enough to help every developer grapple with the cloud.
Great, now that you have identified a global trend/problem and proven you have assembled the right team, walk investors through how you will solve the problem. Here are the questions you should answer in this part of your story.
How does the product work? Are there technical moats or architectural reasons that this solution is preferable or particularly enduring? Don’t be afraid to get in the weeds, especially with technical investors!
How is the solution performing in the market? What have you learned in your early go-to-market tests? This is where you will reference the metrics above.
What would a Series A unlock for you? Where would you invest the capital and what’s the next milestone before your Series B?
Finally, if you succeed, what does the world ultimately look like? What do we think that is worth to customers? Paint an exciting, visionary picture of the future.
Here’s a bad example: The cloud is a $3 gajillion dollar market, according to a market research firm, and we are going to capture it!
Here’s a good example: We envision a world where every engineer can focus on shipping core product features and not have to worry about making event-driven architectures in microservice environments work. Every signal we are getting from the market is telling us developers want to work this way, and we believe we can capture upwards of $20/developer/month as we scale through organizations like Twilio, Zoom, and Atlassian.
In conclusion, raising a successful series A for a developer-focused company is about collecting the right evidence and presenting it in a clear, concise, and compelling way. By the end of your pitch, an investor should feel like your product is going to happen with or without them – so they had better move quickly to get into the deal.
Happy fundraising :)