Transforming Your Fundraising Strategy From Series A to Series B with Jon Perl

0:01Boom! Shake the room, Fire Nation. JLD here and welcome to Entrepreneurs on Fire. Brought to you by the HubSpot. Podcast Network, the audio destination for business professionals with great shows like Systems Saved Me. Today, we'll be breaking down how to transform your fundraising strategy from Series A to Series B and to drop these value bombs. I have brought John Pearl into EO Fire Studios. John is the co-founder and CEO of QA Wolf, which specializes in automated end-to-end test coverage. He is committed to freeing people from repetitive tasks. In today's foundation, will talk about the fundraising story, the current environment of fundraising, going from series A to series B, and how to provide real value to a meaningful audience and oh, so much more.

0:46And a big thank you for sponsoring today's episode goes to John and our sponsors. The Next Wave, your chief AI officer, hosted by Matt Wolf and Nathan Lands, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Matt and Nathan are leading AI creators in your guiding light in the AI and technology frontier. AI technology is transforming the way we do business and the media landscape is fragmented. The Next Wave strives to be the leading podcast on AI technology and how you can apply it to growing your business. Listen to The Next Wave wherever you get your podcasts.

1:20The internet's best converting checkout is here. Did you know that Shopify is up to 36 % better compared to other leading commerce platforms? Sign up for a$1 per month trial period at shopify.com slash onfire, all lowercase. Go to shopify.com slash onfire now to take your business to new heights. John, say what's up to Fire Nation and share something that you believe about becoming successful that most people disagree with. What's up, Fire Nation? something that most people disagree with. It's really that people underrate generosity when it comes to starting a company or just in business. I have shared at a bunch of meetings that we host with other engineering leaders our compensation strategy, which is to pay top of market comp and attract the best.

2:17And I found that they say, oh, wow, that's awesome. We'd love to do that. But our company would never go for this. and I found that if you can look at things as a positive sum game, how can I make this work for the other person and for me and make it a win-win? That's really been helpful for us along the way and I think that instead of being stingy on things like equity or compensation, how can you set up incentives and compensation to really be generous and then expect a lot out of people that you're working with. I love that. And Gary Vaynerchuk actually talks about this a little bit where he kind of funnily mentions that people, especially founders, are like, Gary, I just don't get it.

3:09Like my employees don't work nearly as hard as me. It's like they don't even care. And he's like, well, of course they don't care because you have all the upside. They're just getting a paycheck. Like, what do you expect them to do? Like you're killing yourself to try to make it. They're just killing themselves till the weekend till they can go and party and have, you know, a fun time and do their thing because you're not giving them equity because you're not giving them buy in. So he's a big believer in that. And I love that generosity of having people on board, having them committed to winning together.

3:41I think that's a super powerful thing. I can always remember when I was young, this was an interesting tidbit for me. I would walk into Walmart and I'd always say like, like, mom, like, why is the Walmart stock price on the wall there? And you could just tell that the employees are kind of glancing over there quite a bit being like, okay, let's see if that ticks up a little bit because they were in a sense in a smaller sense, but they were bought in because Walmart was issuing them shares as part of their compensation plan. Now they might've cared just a little bit more to be a little bit nicer, to work a little bit harder.

4:12So what are you doing fire nation to be generous and to get buy-in from your team, from your employees, from people who are working hard for you. And today we're focused on transforming your fundraising strategy from Series A to Series B. And this is a very timely episode for a lot of reasons we'll get into. But I first want to start off with QA Wolf's origin story of that first round of fundraising back in 2021. So John, take that away. Yeah. So our first round of funding, We started the company in 2019 and we hit product market fit in the summer of 2021, something like August. That's when we launched the offering that we have today, test coverage of the service.

4:59And we went from zero to a million in annual recurring revenue AR in about three months. We had the metrics we needed to raise around a funding. and it was really important to get that round done because I was listening to a few podcasts like the All In Podcast is one of them and they were talking about how we're at a market high right now and in terms of valuations, deals getting done and dollars being invested in venture capital and things are going to change. So I had a lot of pressure to get the Series A done and from having our first meeting to term sheet, We had a term sheet within two weeks.

5:44We signed that term sheet within three weeks. And the round was closed a month later. So it was a very fast process. This was all remote. You could have a lot of meetings very quickly. And that is really radically different than what our Series B looked like because the market completely changed between them. but our series a the key to being successful there and really the key to being successful with fundraising is to focus on making your business successful the narrative will be a multiplier on the underlying business that you have in terms of raising funding but we've always focused on how can we deliver value to customers how can we increase our revenue and have our customers be the ones funding the business and and then use investment to expedite things so i think that's the mindset that is extremely important now.

6:38But that set us up for success for both fundraisers. And happy to share more about what the Series B look like. Now, you did just mention, and this is just a reality that there's been a shift in this market. I mean, it's a reality for anybody that's been involved in any way, shape or form. You know, this macro economic environment seems to be ever changing. We're in obviously a very dynamic time here in 2024. So talk about this specific shift. And as you mentioned, I do want to get detailed now about your approach to raising your series B in 2024. From 2021, which had historically high multiples to the market correction, it really started in 2022.

7:21Companies started to lay off, interest rates came up, and that has led to there being less money to invest in companies. So with the same number of companies that are going out to fundraise, there's less investments that are going to be made, there's less dollars that are being spent, and the bar just increased significantly. Also, there's a lot of... I think it's changed a bit more recently, but since valuations were coming down so quickly, VCs were hesitant to make investments and to deploy capital. So not only, you know, there was a bunch of confounding and compounding factors that led to less dollars being infested in the companies.

8:06And that meant that VCs were really looking at metrics for our Series B and for other companies that they're investing in as core to their decision making in terms of, you know, whether they're going to make investment or not. So for our Series B, unlike our Series A, and this is true whenever you raise a Series B, it's not just that you need to have traction and revenue growth and heavy customers, but investors also care about how capital efficient you are. How many dollars did you spend before you were able to acquire more revenue? And what's your CAC payback? How much does it cost for you to acquire customers.

8:52So these are all things that really mattered when we raised our Series B that didn't really matter when we raised our Series A. It was, did we have traction? Did they buy into our narrative? And I think that due to there being a lot less capital being deployed, things like capital efficiency became a lot more important in our Series B than maybe would have if we raised that in 2021. All right, Nation, I hope you're really dialing in on those two words, capital efficiency. I mean, this is going to be critical for your success as you're making a similar transition. But I do want to move into something that's just really kind of taken over the world and both an exciting and interesting and, you know, sometimes even scary way.

9:35And that's this AI boom. I mean, it's having a massive impact worldwide. So let's talk about the impact that AI had on your pitch to new investors, because I really want Fire Nation to see if this would fit in their model as well. It's funny, you know, when investors would naturally ask as part of us raising money, how does AI fit into your story? It was like sort of a default question that everybody would ask. And I've always been allergic to doing things to go through the motion or, you know, to hype hype stuff up without there being something material behind it. There's definitely a ton of hype around AI, and it's something that investors ask about.

10:17I think it's really important to have merit and results behind any AI story. We started the company actually building AI to automate QA. That was at the core of what we did five years ago. We started QA Wolf, and it didn't really work. We put that on pause. And now with GPT-4 that came out last year, I guess over a year now, when GPT-4 came out, we started to invest in AI. We built an AI team to start to build an agent to automate QA. And by the time we went out to fundraise, we had proven results on the third version of our AI that we could automate about 80 % of what some of the tasks that our people were doing manually.

11:03So we hadn't rolled it out to all of our customers, but we had demonstrable results from the AI investments that we've been making to show the impact that AI will have on QA Wolf over time. And I think that that's very important. It's easy to slap AI onto something. But I think if you can demonstrate results and show how not only do you have a vision for how AI will impact your business, but you have proof to back that up, then I think that that can be very compelling. And that was core to our story with this Series B. I think if it's not something that is meaningfully going to drive the business forward, Um, maybe you can get an investor to invest in, in your business, but I think most VCs will see through that.

11:57Um, so it's really important to have those results to back up, um, your story and, uh, and work through that. Fire Nation, wise words from an experienced individual in this situation, in this opportunity that's, again, is this very dynamic world that we're living in as this shift is happening in 2024. so it's critical that we're learning from people who are going down this road. We're all standing upon those shoulders of giants. Let's keep learning as soon as we get back from thanking our sponsors. Being a small business owner comes with a lot of challenges, especially now. It seems like everyone is working with smaller budgets, shorter timelines, and sky-high expectations, and that can make growing a business feel pretty painful.

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15:13Plus, they've got Shopify magic, your AI-powered all-star that helps you sell more with less effort. Need help? Shopify's award-winning support is there for you every step of the way. Sign up for a$1 per month trial period at shopify.com slash onfire, all lowercase. Go to shopify.com slash onfire now to take your business to new heights no matter what stage you're in. Shopify.com slash onfire. John, we're back and it is critical. I mean, absolutely critical to demonstrate success from your Series A if you're going to woo those investors for that Series B. I want to get even deeper into how you accomplished this because this is a playbook that I know other people could follow.

16:00Yeah, so Series A, we hit product market fit, we hit a million of AR, and we had customers that investors could call and ask them, you know, do you like QA Wolf? Is it making impact in your business? Is this a painkiller? Or something that's just nice to have? And we could answer those things. For Series B, we had more revenue, we had more customers, and we had a lot more metrics for investors to look at. So some of the things that we talked about earlier, CAC payback period. These benchmarks change over time, but there are pretty clear what are good, great, and bad ranges for various benchmarks that you can Google.

16:46So on CAC payback, 18 months is good CAC payback. We checked that box. For sales efficiency or burn ratio is about capital efficiency. So how many dollars are you spending in your business versus how much revenue did you add? If you're adding$1 of revenue for every dollar you're burning, then you have a burn ratio of one. And that's good. Anything under that is really great. So burn ratio is important. You want to make sure you can check that box for a Series B. And then your growth rate is really the most important thing that investors are going to look at. how much growth do you have in terms of your revenue this year versus last year?

17:39It depends on what stage of business that you're at. For Series B, growing your revenue three times year over year would be fantastic. You need to be at least doubling your revenue. That's an important benchmark to hit. And if not, there are other types of investments that you can go and raise. It doesn't necessarily have to be venture capital, but venture capital, they really care about growth. And then margin is also important. So those are all different things that investors looked at that really didn't matter so much in the Series A. And of course, retention is also very important. So how of a dollar of revenue, your gross retention, how much of customers last year, how much of that do you still have this year?

18:30If you're losing more than 20 % of customers' revenue in terms of gross retention, that's bad. You have this leaky bucket that you need to solve. solve. So understanding where your metrics are for these things that investors look at and the benchmarks that are out there, that's very important to understand. You might be able to explain away one of them now. It used to be you had more leeway, but you do need to understand what investors are looking at and have that be a core part of your pitch. because there's less dollars being invested in companies and things have gotten a lot more competitive.

19:14So let's say you are successful in this Series B, and I'm just talking in general for individuals. I want to now talk about the advantages that they can expect that this new round of funding will offer them. And maybe you can talk from a firsthand experience on the advantages it's going to offer you. The advantages of everything that's funnier that we can invest more in the business and deliver more value to our customers and help us with our mission of eliminating every software bug in the world. We went out to raise this funding to do a few things. One was to test more features for our customers.

19:49So we started off just testing web applications. Now with this funding, we're going to be able to test Android and iOS apps as well, which is the number one request we've always gotten from customers. and with web testing, we've been able to make a massive impact for the companies we've been working with. We've helped reduce the amount of bugs that they ship by 75 % and we're speeding up our customers' ability to release new features by five times on average. So being able to bring that to mobile apps really broadens how many companies and how many tests we can help our customers prevent bugs with.

20:30So that's something I'm really excited about. Also, we're going to be able to invest a lot more into AI, which is something that we talked about earlier. And our investment in AI, it's really to drive down the cost of test coverage for our customers. The more we can automate, the more tests we can provide to them faster at a lower cost with a better experience because we can turn around results quicker. And so those are the things I'm most excited about. with this funding that we have. Both of those are nice to have. So, you know, when we went out to raise this funding, our core business of testing web apps was solid.

21:12And, you know, one of the things, this goes back to fundraising, but one of the ways I really like to run this business is to make sure that any fundraise that we do is optional. So we didn't have to raise this round of funding. We would be on a path to profitability if we didn't raise the round of funding. But since we did raise this round of funding, now we have the ability to expedite our roadmap and to bring some of the things we would only be able to do much later, earlier, and deliver a much bigger impact for our customers. Yeah, it's pretty exciting. Now, I want to get really detailed for our listeners today about recommendations that you have that you can share right now for those that are pursuing fundraising for their startup?

22:01Lessons learned, tips, tactics. What do you got for us? In our series A, I hadn't met any of the investors before going out to kick up our fundraise. I think nowadays and for our series B, it's much better to be proactive and to start building relationships earlier on with investors so that they understand what you're building and you can build that relationship and trust. And when you say you're going to do something, by the time you got to fundraise, maybe nine months or a year later, you can show that you actually accomplished what you set out to do. And I think being proactive and building those relationships earlier is much more important now because it goes into, I guess, the second piece of advice which I have, which is to have very clear set of evidence as part of your story.

22:55So you can have a demonstrated track record of success. The investors that are going to be digging into metrics and where you fit alongside other potential investments that they're making, you have, you know, very clear metrics that back up the narrative about the future vision of your company. Because that's something that investors are really digging into these days in a way that they didn't in the past. Those are two pieces of advice that I have for entrepreneurs that are looking to raise funding in today's environment. Now, John, we've talked about a lot of things today. We talked about the AI boom, your recommendations for people that are looking to start to network, to potentially fundraise, your experiences, your different tactics and tips that you'd recommend.

23:44What would you say the one key takeaway from our entire conversation would be for Fire Nation today? The one key takeaway I have for Fire Nation is to really focus on building your business to be successful without investment. And if you focus on how can I make more money with my customers and not need to raise money, it makes you that much more compelling to invest in from an investor's perspective. So I think if you put your customers first, focus on building a successful business, then it'll be much, much, much easier to raise funding, and especially in today's environment. Now, John, Affire Nation has loved what they've heard and they want to learn more from you.

24:32They want to connect with you and your company. What call to action do you have for our listeners today? If anybody wants to reach out, I'm more than happy to help other entrepreneurs. You can reach me at my email, which is J-O-N, John at QAWolf.com. Fire Nation, you're the average of the five people you spend the most time with. You've been hanging out with JP and JLD today. So keep up that heat. And for links to everything we talked about, visit EOFire.com. Just type John, J-O-N in the search bar and the show notes page will pop right up. And John, one more time, give that email. It's John, J-O-N at QAWolf.com.

25:13John, thank you for sharing your truth, your knowledge, your value with Fire Nation. For that, we salute your brother and we'll catch you on the flip side. Thank you so much, John. It was great to be here. Hey, Fire Nation. A huge thank you to our sponsors and John for sponsoring today's episode and to Fire Nation. Successful entrepreneurs accomplish big goals. That is why I created the Freedom Journal to guide you in accomplishing your number one goal in 100 days. And we're talking step by step. Visit thefreedomjournal.com. And I will catch you there or on the flip side.

26:10Listen to The Next Wave wherever you get your podcasts. The internet's best converting checkout is here. Did you know that Shopify is up to 36 % better compared to other leading commerce platforms? Sign up for a$1 per month trial period at shopify.com slash onfire, all lowercase. Go to shopify.com slash onfire now to take your business to new heights.

26:42Thank you.