It’s taking longer than ever to raise a Series B. In the first quarter of 2024, the median time between a company’s Series A and its Series B extended to about 27 months, the longest interval in the past five years, according to Carta data.
Meanwhile Series B deal count was down 12% year-over-year, from 180 to 158, though capital raised ticked upward, from a total of $3.8 billion to $4.2 billion year-over-year.
>> See data on fundraising, valuations, and more: Download the State of Private Markets data report for Q1 2024
Kahuna Workforce Solutions, a Houston-based company that builds operational skills and competency management software, raised its Series B despite these tough conditions. The $21M round was led by Resolve Growth Partners.
Despite the more challenging macro conditions compared to previous company fundraises in 2019 and 2021, founder Jai Shah wasn’t daunted. He stuck to his usual fundraising playbook: Avoid getting caught up in the hype machine, run a small process, and raise a moderate, right-sized round from one key investor.
We sat down with Jai to hear more about his fundraising process as part of Fundraising Files, an interview series with startup founders who use the Carta platform, diving into how they raise money and build companies.
Highlights
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Raising in dramatically different macro conditions
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Why tough diligence is a good sign
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Balancing current stakeholder needs in later rounds
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Negotiating before term sheets, not after
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Finding the perfect match for lead investor
CARTA: You just raised your Series B. Tell us about your fundraising journey up to this point.
JAI SHAH: In 2019, we did our first true fundraise, a relatively small Series A. At the time—2019 through 2022—it felt like it was all about fundraising: The bigger the raise, the bigger the milestone and the celebration.
We took the opposite perspective, which was to always think about right-sizing the fundraise to what we needed and protecting dilution as founders and for our employee option pool.
We've always prided ourselves on being capital-efficient. We didn’t want to just park money on the balance sheet. That's been an overriding principle for all the decisions around both debt and equity. So 2019 was a right-sized Series A with a firm called Houston Ventures.
This was a good fit: They are local to our headquarters. We service the energy market; they know the energy vertical well. And then we did a Series A-1 raise with the same investor, Houston Ventures, in 2021. Those were our two major fundraising events before the Series B.
So I imagine raising this recent Series B, you faced very different macro conditions than in 2019 and 2021?
Definitely different market conditions. And I think in some ways it proved us right in terms of what we didn't do previously. I really believe one of the principles of any fundraise should be to be realistic about your valuation and the amount of money that you want to raise.
I don't think it serves any of the stakeholders well to raise above the average valuation for your segment of the market or to raise more money than you know how to deploy from a capital allocation perspective.
We took the same approach in the Series B raise. We were lucky that we had a lot of options despite running a controlled process. Out of five pretty serious conversations, we ended up with four term sheets. Most of those came out of relationships that we had cultivated through the previous processes we'd been through.
We decided to partner with Resolve Growth Partners, which is the perfect match for us. It was a relationship that evolved over several years. Both Resolve and Kahuna were aligned and realistic about the valuation, raising an amount that spoke to what the business needed, and balancing current cap table stakeholder interests.
We hit the sweet spot with them. They were very flexible and how they thought about a transaction that served everybody's needs.
That’s interesting that you only had a handful of conversations. How did you decide the scope of your process when you set out to raise?
There’s a bit of a dichotomy happening in this market. In 2023 the conditions for fundraising were obviously more difficult, and it was really hard to consummate a deal.
However, the inbound interest from investors has never been higher. My inbox was flooded.
Investors are doing biz dev and reaching out to companies all the time, and it doesn't necessarily hurt to have that initial conversation. But the question as we approached the raise was, do you go run a big wide process and try to have 100 conversations and narrow that down? Or keep it smaller?
In the end, I still had to run the business, so we didn't have the capacity to do a massive process. Nor did we want to.
Despite what the macroeconomic conditions looked like, we had a really good story to tell coming out of COVID-19, and the time was right to raise in 2023. And so when I say we had five conversations and four opportunities, all but one were former long-running conversations that just evolved to, “Hey, the time's right for you, the time's right for us.” They were all slightly different approaches, and we settled on the approach that really hit home for us.
Was it important to you to have that one substantial partner versus a wider round? How did you think about that?
For me, it's about having one substantial partner, because we're in a growth phase in a complicated business, so I want to partner with somebody who is invested enough that they're going to wake up thinking about Kahuna and how to help.
We didn't see the need to open the round to more subscribers, because we got the target investment amount from one investor. And frankly, that's just more stakeholder management, the more you take on. It works well; the dynamic’s great.
Our thinking is that the fewer cooks in the kitchen at this point, the better. But I can appreciate that may not be true for every business.
The other thing that helped us move quickly was the Carta functionality. Specifically, the data room functionality, the cap table analysis, and the ability to model out investment scenarios—that was huge. That was really helpful in this process. Excel wouldn't cut it, in terms of really having the assurance that we're doing this right.
Another important party in this is your counsel, and we use Latham & Watkins. They were fantastic, and very familiar with Carta as a tool, which just makes everything so much easier and transparent.
Now that we’ve talked about your reasoning around having not just a lead, but a solo investor in this round, how did you decide on Resolve? What made them the right fit?
It came down to alignment on what the next evolution of the company looks like and how they can help us get there. When an investor is willing to dig in and understand your business, at a level that is in some ways better than you understand it, that's very refreshing.
It's so much more refreshing than, “Hey, we'll just write a check, and the check looks like this, and we can write a big check.”
That's nice. It's flattering. But for me, the tougher the diligence, the more in-depth the questions, it showed a willingness to understand what our business was and, more importantly, what our business wasn't. It ensures alignment in terms of the type of evolution that we need to scale.
Resolve 100% hit that out of the park. They dug in on our business, and that's what made them the right partner.
I’m curious about what it’s like raising in later rounds, and the dynamic with existing investors and their involvement in the process. How did you navigate that?
Probably the most challenging part of the whole process is understanding the motivations and expectations of your current stakeholders. And that includes a variety of stakeholders in our business.
We believe heavily in an employee option pool, and we consider the effect on the common stock as well as that on our preferred investors.
I also have co-founders who aren't with the business any longer, so that adds another dynamic. For instance, there was the evaluation of whether there should be a secondary portion of this transaction to account for some equity and take chips off the table for founders that aren't with the business anymore, and then how that impacts our current investors and so on.
For me, the fundraising process started with some very direct alignment conversations with current stakeholders. And I'm lucky, I've got a great board, I've got great co-founders and a great first investor. So we started those conversations by reminding everyone about the potential of the company.
We agreed that our first consideration should be what we need to do for the good of the company.
Then if there's a transaction that we can thread the needle on that also accounts for someone’s desires or thoughts on what type of raise we should do, that's a consideration, but it's secondary to what the company needs to grow and thrive.
I think super honest, direct conversation is the only way you get through that phase of things.
I’d recommend documenting that agreement and alignment and then using it as the deal advances and we all tend to forget. If you document those early conversations, you have something that you can go back to as a framework to say, “We all thought this was a success, and this is where we're navigating towards, so I'm just going to remind everybody of that.”
Remember that the way deals are structured and liquidation preferences have a real, tangible impact on your early investors. It’s important to be understanding and empathetic to their position and remember the risk they took in investing in you early. But you also can’t be shackled by that.
It is more art and science, balancing all those different interests.
And, again, I'm lucky that there are a lot of adults in the room in our case, so even though it’s still not an easy part of the process, we ended up in a good place.
Going into the fundraising, how did you think about your goals for what you wanted your valuation to look like? You mentioned earlier wanting to be realistic and rightsize that. How did you put together that realistic view?
I don't think anyone can argue that there's a lot of data available to founders now that maybe wasn't available five or seven years ago. At this point, if you don't know what the sweet spot of valuation is based on your quality of earnings and all the other metrics of your business, then you're not consuming enough content.
So I had a pretty good idea of what that range should look like.
Frankly, once you know that range, you should not entertain fundraising conversations or put the energy in if you aren’t comfortable with something coming in within that range. Once you find that sweet spot you're looking for and set out, then when it gets validated or confirmed, you can't change your mind and get greedy and want more and more and more.
That's how I look at things because I also believe that in the end, these transactions do need to be a win-win-win for all parties. It can't be that your new investor is gritting their teeth while writing the check because they feel like they're overpaying. I don't think that sets healthy expectations or a positive relationship as you go forward.
So, for me, it's about being armed with the information that is accessible to everybody out there because of platforms like Carta.
Once you know the data and what’s typical, and you're comfortable with that, don't change your expectations based on someone who's an outlier who may be pushing that higher. That outlier may cost you in other ways.
There's so much more than valuation when it comes to deciding on an investor. Valuation is certainly important. But it's not the only thing. Again, I think those that claimed victory because they got, you know, 50x on their recurring revenue, they are struggling now because that builds a whole different set of expectations.
Tell me more about the things that you're looking for in investor conversations beyond core deal terms.
I think it’s about how they’re equipped to help your business grow.
First of all: Do you have relevant portfolio experience? What do the other companies in their portfolio look like and how have they performed? They may be in Fund 2 or 3, so let's go look at Fund 1. What did that look like? How did they help? What's the typical growth trajectory? Does that fit the type of business you’re in?
We’re in enterprise SaaS, so if I'm looking at a partner that's traditionally done consumer or transactional SaaS, it's not the same business; they're not going to be able to help me as much. They're not going to understand my problems.
So it's that relatability, relevant experience, and alignment on a five-year plan, and on the ways to measure mutual success along the way. If you can align on that, I think that's 75% of the battle.
After that, flexible deal terms meant a lot to us because I had three different kinds of stakeholder groups to balance, and everybody wanted a little bit of something different.
I found that when you get down to that final 48 hours of “let's get a term sheet put together that's detailed and granular and has everything documented,” it says a lot depending on how willing a new investor is to consider everything I'm balancing and to put forward an offer that's going to address all those different stakeholder needs. I found Resolve to be just perfectly aligned and willing to do that type of work and modeling.
So it sounds like you did most of the negotiating on this round before receiving term sheets, rather than after?
Yes. We tried to nail all of that down before the term sheets were submitted. We did that with a couple of different parties and some showed more flexibility than others. Some were maybe trying to make up for things with just the size of the check and maybe push the valuation a little bit higher but weren't as flexible on, frankly, going lower with their check size. They kind of had a minimum check size.
That's perfectly fair; they've got an investment thesis and they've got LPs and fund requirements. I appreciate that. But just because someone has to write a minimum check doesn't mean you have to take it, right?
I’d recommend having direct conversations as much as you can before the term-sheet stage, versus leaving ambiguity and then having the diligence period and the legal and commercial terms stretch out. To me, that would have been the wrong approach. I think getting the deal terms locked in before the term sheet or as part of the term sheet, that's the only way to go. Leaving ambiguity until later seems like a recipe for disaster. I mean, board seats, control, etc., you have to get it sorted upfront.
The last thing you want after you've committed to a term sheet is someone popping up and saying, oh, and by the way, we want an extra board seat. That's a big deal.
What is your perspective on board seats? Did Resolve join your board?
Definitely. We believe anyone who's invested a significant amount and shows up in the cap table at a certain threshold of equity should have a board seat. Right now, we've got a nice mix of common, independent, and investor board directors. It's a great dynamic for us. And definitely, the Series B and the Series A both warranted a board seat.
It seems like you have great relationships with your investors. Tell us about how you manage those relationships? How often do you communicate? What’s your strategy there?
I maintain a regular operating cadence with both of our investors. They have resources to help us navigate challenges we are facing as a business and frankly that is the value they bring.
Additionally, there's the quarterly board meeting, the prep for that, and then follow-on action items and initiatives that come out of the board meetings.
For those [companies] that have a very complicated cap table with multiple parties that invested in rounds, that regular cadence may not be sustainable for the CEO. It all comes down to what you find helpful.
Additionally, I think it’s important to maintain a core set of relationships with interested parties who are not current investors. It may be a 24-month process before any relationship is consummated, so you want to keep building those relationships.
What that looks like is quarterly or semiannual updates on a 30-minute call that goes over: financials, key contemplations, growth plans, market demand, etc. Keep those people informed. You never know how that relationship is going to pay off.
There are some very helpful people in this industry. For example, I had cultivated a relationship with a later-stage PE firm that was not quite ready to invest. However, they validated our choice of Series B investor which proved very valuable in the moment. I would advise, have five to seven of those in your Rolodex and make sure you're talking to them at least twice a year.
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