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#1 Mistake: Planning for Series A?

October 14, 2024

People sometimes ask us, "What's the #1 mistake startup founders make?" Based on our 2000 pre-seed portfolio companies, one of the prime candidates is: "Planning for Series A."I don't mean the way you plan for Series A. I mean the fact that you do it at all. We see a lot of pre-seed pitch decks. A decent fraction have a "Comparables" section that list the Series A raises for companies with similar models in the same industry. In these cases,  Series A has become an explicit planning goal, despite the fact that these companies are at least two rounds, and probably three or four, away from that milestone. But the prevalence in pitch decks vastly understates the issue. From systematically interviewing 800+ founding teams in accelerators, it's clear that Series A expectations play a substantial role in most founders' planning.

While completely understandable, even considering Series A at the accelerator stage is usually a huge mistake. As I've written before, taking Series A at the point where it's appropriate decreases your success rate (though increases your expected value). Unsurprisingly, actually working backward from a future Series A can create all sorts of planning pathology. Yes, TechCrunch makes a big deal out of Series As. Yes, lot of cool VCs blog about Series A. Yes, VC investment leads to pretty fantastic story lines on "Silicon Valley". But these sources of information inherently screen for outliers. It's still the exception. Even among successful tech startups. Fundamentally, you're trying to engineer an extreme outcome in a highly uncertain environment. On first principles, this is problematic, as Nassim Taleb so beautifully explains the The Black Swan. But let's work through the steps.

Start with a modern Series A of roughly $10M as your goal. OK, those VCs will want evidence that you can quickly grow past the $100M valuation mark. That means you'll probably need about a $3M Series Seed 12-24 months beforehand to build the necessary R&D, sales, and customer success scaffolding, as well as prove out a huge addressable market. This in turn implies a $1M angel round coming out of an accelerator to complete the full-featured version of the product and establish a firm beachhead market over the next 12-18 months.

Now, I can tell you from reading the investor updates for 2000+ pre-seed startups that such rounds are very hard to raise... unless you're a strongly pedigreed founder, have obviously anti-gravity level technology, or have crazy traction in a hot space. We like to say rounds at this stage have a "geometric" difficulty curve. A round that is twice as large is four times as hard to raise.

Even if you manage to raise that round, the failure rate at each subsequent stage is high because you're continually striving to achieve outlier levels of growth. There's not much room for error or setbacks.  It's like trying to run up a ridge that just keeps getting steeper and narrower, with a sharp drop into the abyss on either side.

So what's the alternative? We recommend you ask yourself, "What's the smallest early acquisition (but not just acqui-hire) that I'd be satisfied with?" Unless you have a significant previous exit, are already very wealthy, or have unusual risk preferences, this number is likely somewhere between a $10M and $35M acquisition where the founders still own about 1/3 to 1/2 the company. Then work backwards from that.

Now, you may be saying to yourself, "Wait a minute! If I could get acquired for $10M to $35M, I could get a Series A. It's the same thing." Not exactly. $20M is a typical Series A pre-money these days, at least from a traditional name firm. But you would also need to be able to demonstrate that you could quickly grow to be worth $100M+. And you usually get a bit of a premium on acquisitions. So it's only at the upper end of the range where a Series A would be a fit, and then only some of the time.

Importantly, acquirers mostly want to see a great business or great technology and Series A investors mostly want to see enormous growth potential, which often aren't quite the same thing.

Finally, Series A investors usually want to see extremely rapid past growth, as an indicator of rapid future growth. Acquirers care much less how much time it took you.Also, the cost of being wrong is asymmetric. Say you aim for Series A from the outset. If at any point it doesn't work out, you either fold or do a fire sale. In a fire sale, liquidation preference will kick in and founders will get zilch anyway. Conversely, say you go the smaller route and things go much better than expected. You can still "upgrade" to the Series A path. And if you go the smaller route and fail, there's some chance you'd still make a modest amount in a fire sale or acqui'hire.

So now let's work backwards from the acquisition. We'll assume that revenues, rather than technology capability, is the relevant metric because it makes the reverse induction more clear cut.

  1. In most tech sectors, a $10M to $35M acquisition means $1M to $3M per year in margin (not gross revenues, though in some sectors, the margins are so high, it's the same thing). That's low $100Ks of margin per month.
  2. Next, we like to think in terms of the "straightforward scaling factor". This is the multiple by which you can grow with straightforward scaling of your product development and sales machines. No major overhauls of the product, no completely new channels, and no huge breakthroughs. Basically keep doing what you're doing, but with more resources. In most segments, this factor is 3-4X for a target in the $100K/month order of magnitude. Obviously, it's not a sure thing. Bad things can still happen. It can turn out that you've made a mistake. But it's the difference between needing circumstances not to go strongly against you and needing circumstance to go strongly for you. That works out to $20K to $80K per month, depending on scaling factor and target outcome. Thus, your near-term goal becomes, "Build a business doing $20K to $80K per month in margin."
  3. If your minimum acceptable exit is on the higher end and your scaling factor is on the lower end, you might want to break this stage into two (though your might want to ask yourself why your minimum is higher given the lower scaling factor). In most cases, the first step therefore reduces to, "Build a business doing $20K to $40K per month in margin."

This is often a very achievable goal with a very modest amount of capital. How do you go about raising a round to support achieving this goal? Well, we have a post for that.

It's worth noting that, in terms of our expected returns, it doesn't matter too much to us one way or another whether founders follow this plan. Our funds have many hundreds of companies, so we're expected value decision makers. Though there is also some argument to be made for preserving option value by having companies survive longer. But it's not a huge difference either way at our level of diversification.

However, for founders who can only do a handful of startups in their career, understanding the difference between success probability and expected value could be literally life altering. And don't forget, once you have a modest exit under your belt, you've got the pedigree! So it's much easier to command the resources and attention necessary to go big from the start on the next one.

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This blog post originally published on 12/10/2020 and was last updated on 10/14/2024.

Further Reading

Enjoyed this post? Here are a few more posts that you might find just as insightful and engaging.

For Founders

How Could Funding Possibly Be Bad for You?

One of the most critical (and often overlooked) pieces of advice for founders is this: Think very carefully before taking any round of funding. And no, the primary concern isn’t dilution. The real issue? Funding closes off exit opportunities.

Wait, what? Isn’t an investment supposed to help you build a more valuable company, making it more attractive for an exit? Yes—but it also drastically increases the price tag on your company, which shrinks the pool of potential buyers.

The Economics of Higher Valuations

Investors aren’t in the business of breaking even. They expect a return, and their expectations set a “floor” for acceptable exit outcomes. Most professional investors aim for a 5X to 10X return on their investment. More importantly, they often have legal stock preferences that allow them to block exits that don’t meet their expectations.

At the same time, they have an anchor for how much of your company they want to own—typically 20% to 30% per round. Let’s work through some quick math based on midpoint values of these expectations:

  • Investors want to own 25% of your company.
  • That means the post-money valuation of your round will be 1.33X your current value.
  • Investors want a 7.5X return, so the required exit price becomes 10X your current value.

Every round of funding you take raises your required exit price by an order of magnitude.

The Exit Math in Action

Let’s put this into perspective:

  • Seed Round: Suppose you raise a seed round at a $3M pre-money valuation. Now, to hit a 10X investor return, you need at least a $30M exit. Doable.
  • Series A: You raise at a $10M pre-money valuation. Your new required exit price jumps to $100M. That’s a steep climb.
  • Series B: Now you’re raising at $25M pre-money, pushing your required exit to $250M. How many companies exit at this level annually? Only about 50 to 100.

And yet, each year, there are roughly 1,000 early-stage VC investments competing for those exits. The odds? Not great.

The Series A Cliff (and Beyond)

There’s a well-documented drop-off in exit opportunities at Series A and beyond. Every round you take exponentially reduces the number of viable buyers, making an acquisition increasingly difficult. Founders should weigh this reality carefully: is the progress you’ll make with additional funding worth the dramatically narrower exit path?

Funding isn’t inherently bad, but it fundamentally changes your trajectory. Before you take that next round, ask yourself: Are you truly ready for the stakes to go up?

This blog post was originally published on 07/02/2013 and last updated on 12/14/25.

For Investors
For Founders

What Is Pre-VC Funding? It’s Investing Ahead of the Herd

It used to take millions in funding to build a tech startup. Before cloud computing and open-source software, launching a product required expensive hardware, in-house servers, large engineering teams, and significant capital just to reach early milestones. Because of these high costs, venture capital firms primarily funded startups at the Series A stage, when companies needed large investments to scale.

Over the past two decades, however, the cost of building a startup has plummeted. Cloud infrastructure eliminated the need for expensive servers. Open-source software reduced development expenses. Low-cost distribution channels made it easier than ever for startups to access customers. As a result, early-stage investing has evolved, giving rise to new funding stages—first Seed, then Pre-Seed, and now Pre-VC—each emerging as the capital required to launch a company decreased.

For investors, this shift presents a compelling opportunity. While traditional VCs continue to focus on larger deals, many early-stage companies are raising smaller rounds well below the investment minimums of traditional institutional venture capital. The result is a funding gap—the Pre-VC stage—that remains largely overlooked by institutional investors, creating an open playing field for those who recognize its potential.

How Early-Stage Investing Evolved

From Series A to Seed: The First Shift (2000-2010)

Before the 2000s, Series A was the starting point for venture capital, with round sizes typically ranging from $3 million to $10 million. Startups at this stage were often pre-revenue, and investors focused on market size, the strength of the founding team, and long-term growth potential rather than financial performance. Funding rounds below $3 million were often limited to angel investors, friends & family, and bootstrapping.

As technology became more capital-efficient, startups needed less money to build and launch products. This shift led to the rise of Seed rounds. By the mid-2000s, dedicated Seed-stage VC firms formalized Seed investing, with round sizes typically between $1 million and $3 million, making Seed a critical bridge to Series A.


The Rise of Pre-Seed: The Next Gap (2010-2020)

As costs continued to decline, some startups needed even less capital before raising a Seed round, which led to an explosion of Micro-VC funds and the emergence of Pre-Seed funding, with rounds typically ranging from $750,000 to $3 million, a space that had formerly been the sole domain of angel investors, friends & family, and accelerators. However, as more founders sought early capital, Pre-Seed investing became more structured. Also, the introduction of the SAFE note by Y Combinator in 2013 played a major role in standardizing these early rounds, making it easier for startups to raise funds without the complexities of traditional equity financing.

Much like Seed rounds a decade earlier, Pre-Seed investing grew over time. Traditional VCs were initially hesitant to participate due to the small check sizes and the labor-intensive nature of early-stage investing. But as startup funding continued to evolve, Pre-Seed rounds became more popular, and many institutional investors now actively participate in this stage.

The Emergence of Pre-VC Investing

Just as Seed investing institutionalized in the 2000s and Pre-Seed evolved in the 2010s, a new funding gap has emerged between angel rounds and institutional VC: Pre-VC investing.

Today’s institutional venture capital firms typically avoid participating in rounds below $1 million, leaving many early-stage startups reliant on friends & family, angel investors, or their own resources. If this story sounds familiar, it’s because it is. In the 2000s, Seed investing was considered too early for institutional venture capital—until it wasn’t. In the 2010s, Pre-Seed investing was dismissed as too small—until it wasn’t. Now, Pre-VC faces the same skepticism from traditional investors, even as it quietly grows.

While large VC firms hesitate, this emerging stage presents an opportunity for investors willing to adapt. Just as institutional investors once overlooked Seed and Pre-Seed, they are now bypassing Pre-VC. This stage represents a market inefficiency, one that investors can leverage by building diversified portfolios of high-potential early-stage startups.

Why Pre-VC Hasn’t Caught On with Most Institutional Investors

Traditional venture capital firms aren’t ignoring Pre-VC because it lacks potential. Instead, structural challenges within their investment models make it difficult for them to participate effectively.

One challenge is that early-stage investing is labor-intensive. Most traditional VC firms pride themselves on using their subjective expertise to pick winners. They evaluate thousands of pitches annually and conduct extensive due diligence before making an investment. The hands-on nature of their involvement makes it difficult to justify small investments.

Another challenge is portfolio construction math. A traditional $100 million venture fund might invest in 25 companies, with an average of $4 million per company. Smaller investments don’t make economic sense for most VCs because they require just as much time and effort as larger deals while contributing little to overall fund returns. A $250,000 Pre-VC check, for example, is too small to justify the labor involved and too insignificant to meaningfully impact the fund’s performance.

For large institutional VC firms, Pre-VC investing simply doesn’t fit their model.

Why Pre-VC Is a Significant Opportunity for Investors

The Pre-VC stage is attractive to investors for two key reasons: capital efficiency and competitive valuations.

Startups at this stage tend to be exceptionally capital-efficient, benefitting both founders and investors. Highly capital-efficient startups have less reliance on external funding which means greater resilience during bad funding markets, like what we’ve seen over the last couple of years. This can mean less dilution risk and higher potential return on investment. Capital-efficient companies can also pivot faster and adapt to market changes.

Many companies at this stage reach profitability early, which means Pre-VC isn’t just their first funding round—it could be their only funding round. Investors at this stage have the rare opportunity to buy meaningful ownership in startups that may never need to raise additional capital.

In addition to capital efficiency, valuations at the Pre-VC stage remain highly attractive. While valuations at all VC stages have soared in recent years, Pre-VC valuations have remained relatively flat. As an example, between 2014 and 2024, Seed valuations rose by 183% according to Pitchbook. In contrast, valuations for Pre-VC investments at Right Side Capital Management (RSCM) increased by only 10% during that same period. This is all a function of supply and demand of capital. During the past decade, especially before 2022, thousands of new VC firms were created, and the VC industry raised tremendous amounts of capital, leading to ever-increasing valuations.  But at the Pre-VC stage, demand has risen every year from founders but very few institutions address this demand, keeping valuations depressed.

Since 2012, RSCM has invested in over 2,000 startups, specifically targeting this funding gap. By streamlining the investment process and challenging traditional VC norms, RSCM has been able to exploit the inefficiencies at this stage and invest in promising early-stage companies at significantly discounted valuations.

Data from Pitchbook

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Pre-VC Funding: Investing in the Future Before the Herd Arrives

Early-stage venture funding has always evolved. Seed rounds were once an informal and overlooked segment of investing until they became institutionalized. Pre-Seed rounds followed a similar trajectory, initially dismissed as too small before maturing into a widely accepted funding stage. Now, Pre-VC is emerging as the next logical step in the evolution of early-stage investing.

This funding gap exists not because startups don’t need capital, but because traditional investors aren’t structured to provide it. For those who recognize this shift, Pre-VC represents a rare and valuable market inefficiency.

  • The cost of building a startup has never been lower.
  • Institutional VCs are ignoring this stage.
  • Valuations remain competitive.

As the venture capital landscape continues to evolve, investors who recognize this shift now will find themselves ahead of the herd—investing in the future before the rest of the industry catches up.

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For Founders

The Truth About Small Seed Rounds

Have you ever finished a challenging task and thought, I went about that all wrong—why didn’t anyone warn me? If you’re gearing up to raise a seed round, consider this your warning.

When faced with a challenge, most entrepreneurs seek out as much data as possible, then dive in. For fundraising, that often means scouring TechCrunch, listening to founder stories, and analyzing top VC blogs. But these sources are inherently biased—only the most unusual cases make the headlines. If you optimize for the outlier, you’ll struggle with the typical case.

At RSCM, we've observed or participated in hundreds of rounds over the last decade. We know what the typical seed raise looks like—and how to navigate it successfully.

The Two Most Common Mistakes: Too Much Money & Fixating on a Lead Investor

The biggest fundraising mistakes we see are:

  1. Setting a target raise that’s too high.
  2. Getting anchored on the idea of securing a "lead" investor.

Raising a seed round is rarely easy. But the difficulty increases dramatically when moving from a $500K target to $1M+. At that stage, you usually need significant revenue, a well-known founding team, or truly breakthrough technology. While it’s possible to find investors who fall in love with your idea, the odds are low, and the effort required is high.

Even if you meet these extreme criteria, raising $1M+ often requires a lead investor. You might think, That’s fine, I want a lead! But consider this analogy: If you’re an engineer, would you design an architecture with a single point of failure? In marketing, would you create a campaign targeting the lowest-converting users? In sales, would you prioritize prospects with the longest sales cycles? Probably not—yet that's effectively what founders do when structuring a round around a lead from the outset.

If you don’t secure a lead, you could end up with nothing. The universe of lead investors is smaller, they take longer to engage, and closing them is a lengthy process. This delays fundraising and distracts from building your business. Unless your company has at least $20K in monthly revenue, a dozen professional investors already interested, or an absolute need for a large capital infusion, this approach is suboptimal.

A More Effective Strategy: Modest Raise, Brick-by-Brick, Graduated Pricing

If you have little revenue and a limited investor network, start with a modest raise—$250K to $500K. Ensure your plan demonstrates clear progress with this amount and that your cash burn aligns with reasonable milestones.

Step 1: Secure Initial Commitments

Begin with your strongest supporters—friends, advisors, early customers. Many founders hesitate to ask for small checks, thinking it won’t move the needle. But at the start of a raise, momentum is more important than amount.

Offer attractive terms to incentivize quick commitments. A convertible note with a 20% discount, 5% interest, and a compelling cap is a good starting point. A lower cap at the beginning rewards early investors for moving quickly.

Step 2: Raise the Cap Gradually

Once you’ve secured $100K–$200K, bump the cap up. The “great deal” becomes a “good deal.” The increase should reflect investor demand—if early commitments came quickly, raise the cap two notches; if it took longer, only one.

Continue creating urgency. Tie limited-time offers to natural deadlines, such as an accelerator Demo Day, a major product release, or a customer launch. Investors respond to scarcity—use it.

Step 3: Build Toward an Optional Upgrade

Once you’ve closed 50% of your target, you gain leverage. You now have money in the bank, customer traction, and reduced risk. At this stage, you can:

  1. Tap into bigger geographies. If you’re outside SF or NYC, start pitching investors in those markets.
  2. Leverage platforms like AngelList. A strong lead can attract syndicate funding.
  3. Approach small funds that lead rounds. With momentum, you can explore a larger raise.

Sidebar: Process Matters

Fundraising requires structure. Track your prospects in a CRM or spreadsheet. Categorize investors into:

  • First check: Early believers who can move quickly.
  • Second check: Investors who follow others’ lead.
  • Later check: Those who need more traction before committing.
  • Lead investors: Professional funds who might anchor the round.

Initially, focus on first and second-check investors. Ask them for referrals to expand your pipeline. Engage with later-check and lead investors early but don’t prioritize closing them until you’ve built momentum.

Oversubscribing, Securing a Lead, and Converting if Necessary

If demand is strong, you may be in a position to upgrade your raise. There are two paths:

  1. Oversubscribe: If interest exceeds your target, tell investors you’re at capacity and need firm commitments. Use scarcity to drive action.
  2. Entertain a Lead Investor: If a fund expresses interest in leading, push for a term sheet within 7–10 days. Avoid holding out so long that you lose other investors.

Most institutional investors are comfortable leading a seed round with a convertible note. If you’ve already raised via notes and a fund insists on a priced round, don’t worry—you can always convert the notes into equity.

Final Thoughts

It’s easy to adjust when things go better than expected. Plan for the typical case, not the outlier.

Depending on market conditions, only 10-20% of seed rounds have a true lead, and another 10-20% are oversubscribed. That means 60-80% of rounds follow the standard path: a gradual raise without a formal lead. And that’s completely fine.

Fundraising is difficult. Raising $250K to $500K gives you roughly a year of runway. And we’ve seen firsthand how much founders can achieve in a year. Focus on building, execute strategically, and the capital will follow.

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This blog post was originally published on 07/18/2016 and was last updated on March 12, 2025.