What sets apart a startup ready for Series A funding from one still in the seed stage? Join us as we uncover the answer with Sun Jen Yung, partner at Nfluence Partners. Together, we break down the critical elements that signify a startup's readiness.
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Episode Transcript
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0:00:09 - Dmitri
Welcome back to Music Tectonics a how to start up edition. I'm your host,
Dmitri Vietze. I'm also the founder and CEO of Rock Paper Scissors, the PR and marketing firm that specializes in music innovation, and I'm recording this outside of the Music Business Conference in Nashville, Tennessee. As you probably all know, a Series A round of funding usually is sought after a startup has proven its business model and can show a path to generating revenue. On previous episodes, you've heard about Seed and Angel Investors, as in our interviews with Xavier Peters from Lean Square and Bruce Hamilton from Everybody Ventures, which, if you haven't heard, you should go back and listen to but the Series A round is when you get more into venture capital investments. Our guest today, Sun Jen Young, is here to get you started and give you tips on how to Series A.
is a partner for InfluenceNfluencePartners, a boutique investment bank focused on the intersection of technology and the broader economy. At InfluenceNfluence Sun helps leading growth companies in the middle market with merger and acquisition advisory services and private capital growth formation for both equity and debt. She specializes in digital media and internet, which includes music, creator economy, e-commerce and consumer tech. Sun has been involved in many industry-leading transactions, including selling companies to YouTube, Google, Facebook, Meta, Spotify, SESAC, Ericsson, as well as representing clients such as Bic, Cor and LyricFind on the buy side. Sun also has provided advisory services to DEMA and has been a Techstars music mentor. Sun has completed over $38 billion in IPOs and private equity, equity-linked and debt financings and M&A transactions. Sun received BA degrees in economics and international studies at Macalester College in St Paul and an MBA of finance from the Columbia Business School in New York. Welcome to Music Tectonic Sun.
0:02:14 - Sun
Thanks, Dimitri. Happy to be here, especially at Music Biz in Nashville. It's very exciting.
0:02:20 - Dmitri
Yeah, we're looking over a great view here in Nashville and it's kind of a cloudy, rainy looking day, but it's still beautiful. Yeah, we're looking over a great view here in Nashville and it's kind of a cloudy, rainy-looking day, but it's still beautiful.
0:02:27 - Sun
Yeah, actually it looks like it's clearing up just in time for this podcast.
0:02:31 - Dmitri
Perfect, so tell us more about your background in investment as it relates to music and media tech.
0:02:56 - Sun
I believe, even though I've been a banker basically my entire professional career, to have observed music and media technologies going back to the 1990 of the first online or digital music plays public, when I was at Lehman Brothers. And you fast forward to today, when the whole landscape has totally changed. The music industry, you know, is now dominated by streaming, but there's still tons of opportunities for companies to do a lot to continue to transform the industry and make music much more accessible and interesting for consumers like you and me.
0:03:34 - Dmitri
Yeah, no, it's definitely a shift and it'll be interesting to have this conversation in the context of what's been happening right now. Before we dig in, how does a Series A investment round differ from the types of seed investments we've heard about on other episodes?
0:03:48 - Sun
So the Series A investment round is really the first round of institutional capital, or institutional equity capital that a company will raise, and so they're at the point where they have a product and the product is selling. That's ideal for a Series A, whereas for seed it can still be, you know, in the early stages, the earlier stages of formation, with a lot more risk.
0:04:16 - Dmitri
Gotcha, so I've got my MVP. Maybe, maybe I'm a little further along. I'm actually bringing in some money at this point. Is there anything else that a startup would know from their own, like looking internally to realize that it's time for a C-Day fund?
0:04:32 - Sun
Well, what I would say was and it's never completely black and white, but again if you have a product that's out in the market and it's selling, and to more than one customer then the institutional money will start to look at your company and your business and say, okay, you've hopefully started to find product market fit and so we're willing to put our Series A money to invest to help you scale and grow the business.
0:05:04 - Dmitri
Do you already have to know, like the lifetime value of a customer, the cost of acquisition, that type of thing?
0:05:13 - Sun
I believe that that helps. It's still early stage in its venture capital, which means that there's risk, but I would say some of the differences between raising an earlier round and when you get to Series A is that you start to have these KPIs, like you mentioned, which would be, you know, a CAC or cost of acquisition for a customer, lifetime value, churn retention and other types of metrics.
0:05:43 - Dmitri
Gotcha, so don't be surprised if VCs start asking those questions what types of investors contribute to a Series A round and how does that differ from investors in seed rounds on the one side, or Series B and C raises and so forth?
0:05:57 - Sun
Yeah, well, it's really investors who they don't want to take all of the risk associated with the seed round before a company really has their product out, and so they want to start to see the business model more developed. They want to know that there are positive unit economics and they want to be able to really feel like management has started to break the back on getting a product or a service out to market with customer adoption. And then at the later stages, when you know they need more money, that would be, you know, series B and C and that's really then for total market expansion and you know things like that when a company gets to that stage. But Series A, like I said, it's really the first institutional money.
0:06:51 - Dmitri
Right, so at the seed round you're going to probably start with friends and family, maybe lead out to some angel investors and then maybe even some early, early VCs. Right, but Series A, you're definitely VCs at that point.
0:07:05 - Sun
You're definitely VCs, what people think of as the classic VC at that point. And for Series A, you know it can be again these numbers aren't exact but it can be up to a million dollars, maybe two or three. And then Series A is probably more like. You know three to five or something like that. Two to five. The numbers aren't exact but that gives you kind of a gauge. And then B and C. A lot of times companies will go for much bigger rounds.
0:07:36 - Dmitri
Yeah, gotcha. And do those companies, the VCs that invest in Series B and C? Do they look different than A? Are they bigger companies? Do they just have bigger funds? Do they make fewer investments? Are they private equity companies?
0:07:57 - Sun
No, they well. They tend to be for B and C. They tend to have bigger funds and likewise the Series A investors will have bigger funds than the seed. The seed tranche will have bigger funds than the seed tranche. But also, when you go out to find your Series A and you look for those investors, often you basically want them to have allocated a little bit of money. So, assuming they continue to like your story and your company and what you're doing, they'll contribute even though they wouldn't necessarily lead the Series B and what you're doing, they'll contribute even though they wouldn't necessarily lead the Series B.
0:08:29 - Dmitri
And I guess the next question is how does a startup go about raising a Series A?
0:08:34 - Sun
Well, going back to the beginning, I think you first of all want to try to figure out is my company ready, so product market fit? Have I, am I generating revenue? Can I prove that the product is saleable and I've got more than one customer? And then what I want to do is is figure out okay, well, how much money do I reasonably need to have runway for I don't know, maybe 24 months or something like that in order to get the product really off the ground and into bigger production? And then what I want to do is start to pull together an investor deck, which would be, you know, more detailed and have metrics and a bit more fleshed out than what you probably used for your series A, and then figure out well, what investors, you know, what's the investor group that I want to go to.
0:09:34 - Dmitri
And how do startups start to see, like, how would they find or research who those potential investors are?
0:09:47 - Sun
That's one of the great things about the Internet these days who the most prominent Series A venture capital investors are for your vertical that you're addressing, for your company and then also you know, think about. Are there maybe strategic investors that have funds that I should maybe add to the group that I want to tap?
0:10:16 - Dmitri
Yeah, okay, all right, we have to take a quick break for a message and when we come back, I'd like to hear more about how these startups can get some help. We'll be right back.
0:10:27 - Dmitri
We interrupt this podcast to bring you breaking news. Applications are now open for Music Tectonics Swimming with Narwhals startup pitch competition. Get your application in by August 12, 2024 at musictectonicscom. That's also where you'll find eligibility requirements, a timeline for the competition and an FAQ. When you apply to Swimming with Narwhals, you'll get a warm welcome into the music tectonics community of music innovators and your project gets seen by our juries of investors and experts. You could be one of four finalists in the spotlight at the 2024 Music Tectonics Conference, october 22nd through 24th in Santa Monica, california. It's the place to be for music innovators. Whether or not you reach the finals, we have a demo day on the Santa Monica Pier, panels and networking with everyone you need to meet, from investors to labels, and a very special startup boot camp at the Universal Music Group offices. Apply at musictectonicscom, because sharks are mean, unicorns aren't real, but narwhals narwhals are awesome.
0:11:40 - Dmitri
Okay, we are back here and Sun, I wanted to ask you so some startups may be doing this on their own, or maybe they're technical founders and they don't really want to be the one going out looking for money what types of roles or people can help a startup raise money the kind of things that we've been talking about?
0:11:55 - Sun
Sure, that's a really good question, particularly because the private investment markets in any kind of sector related to technology have been really challenging for the past couple of years, and so I think what you want to do is think about do I have a good lawyer, because they'll help with the documentation? Are there other people in the financial community? Maybe I've gone to some investment forums or some industry conferences where investors will show up and think about are there people I can tap and ask who have they gone to to raise money? You can also take a look at companies that you think are competitive or peers in your space and research who their investors are and think about whether or not there's some investors on that list that would make sense for you to go to. And then also, if you know of any bankers like Series A is too early to hire an investment bank to help you raise the money. I mean, it's just the numbers are still small. Investors don't want to see a company use an investment bank, and you know usually the fees that they would charge would be too much to bear relative to the capital you're raising anyway.
But go out and talk to bankers, see if they have ideas, build relationships and try to get them to help you with introductions too, because that can be really valuable.
0:13:35 - Dmitri
Right. So even though an investment banker, it would be too early for them at this stage with that size of investment, they still have valuable connections and they might pay off later by building those relationships.
0:13:45 - Sun
Correct. Yeah, that's exactly right.
0:13:48 - Dmitri
Got it Cool, very interesting, okay. So when earlier we were talking a little bit about how to do this, you mentioned putting together a pitch deck. I'm curious for series A, how's the pitch different from seed rounds and what additional evidence or information does a startup need to present?
0:14:05 - Sun
Well, I'll go back to something I said at the beginning, which is because it's the first institutional round of money that you're raising, you want the deck to be a bit more filled out than you probably had in your seed round, and that just reflects the fact that you've got product out. So you've hopefully got some KPIs or statistics that talk about the success of the product as well as your business model. And I'll share with you something that I use with later stage companies even, but which you can use as kind of a general structure when telling your story, which is you want to start at the top, at the top of the funnel, which is sort of the widest point anyway, and talk about, well, what is the market opportunity that you're addressing. Talk about, well, what is the market opportunity that you're addressing? Investors want you to think big, because they don't want to just get, you know, two or three times their money. What they're looking for is, you know, like a hundred X. They're looking for the next Google or Microsoft or Facebook or whatever.
And so what you want to do is articulate what is the market opportunity? How big is it? What's the dollar size? What are the dynamics and trends and the challenges that create a situation where the market needs your product and your service. And then that sets up nicely where your company comes in.
And so, starting out with a slide that says you know what we do just a sentence or two makes it really simple and easy for investors to understand and it's an articulation on your part that makes you look really good to investors because they feel like you've got a clear vision as to what your company is all about. And then you get into okay, well, this is our platform or these are our products and services. Here's how it works, here's what differentiates us from the competition. Here's also who we see as our peer group or competitors in the space. This is our plan to go to market and to grow. And then you know what is it about our technology that differentiates ourself? And then, when you get to the financials, then you can start talking about in more depth the traction that you've gotten, what your KPIs are, how you make money, which is how you generate revenue, what your unit economics are, and then how your growth vision translates to financial projections.
0:16:52 - Dmitri
Awesome, that's super helpful. So we talked a bit about the information in that pitch. Is there anything else that someone raising their first Series A should know that we haven't covered yet?
0:17:19 - Sun
for entrepreneurs to think about really. What is the market opportunity I'm going after and why. Is there a real need and is the market big enough that investors can make a have the potential to have a home run investment?
0:17:29 - Dmitri
Do startups struggle with understanding the total adjustable market for what they're doing?
0:17:35 - Sun
Yeah, I feel like they do a lot, and it's not just series A companies, but it's even more mature, later stage companies that are looking for follow on, investments and or even to sell themselves from an M&A context.
0:17:54 - Dmitri
Is that because sometimes they're in new territory where there isn't any data that shows the actual size of the market? Is it because they just don't have access to the data that might be out there, or are they just in markets that are too small?
0:18:10 - Sun
I think it can be a combination of all three. And when you're again, the great thing about the day and age that we live in now is that there's so much information out there on the internet that if you scour hard enough, you can find more times than not. You can find data, or you can put together a few pieces of data that help to tell the story about how big you think the market is, and you can try to make some assumptions that start to guesstimate as to what the size is.
0:18:48 - Dmitri
So entrepreneurs tend to be optimists, and if they're listening to this podcast, they might be convincing themselves that they're ready for a Series A or that they can come up with answers to some of these more difficult questions.
0:19:16 - Sun
Are there some surefire signs that a quite developed enough to raise a Series A, like it's really more kind of pre-seed or still seed Pending markets are a bit more buoyant to go out and think, oh, I can just raise a series A, but you don't necessarily really have the proof points in terms of having the product developed and selling it and you don't have that customer concept or the customer adoption on the product in order to be ready for that stage.
0:19:53 - Dmitri
Yeah, okay, makes sense, so let's kind of flip that. So we talked a little bit about whether the startup's ready, but then also, I assume a startup at some point is going to present a budget to investors, at least to some extent, to say this is how we're going to spend this money, this is where it's going to be valuable. What do you see are the best uses for series A funding when a company is starting to scale up? Get beyond just taking in their first revenue and proving that they have a business model. Where, where, where do you think investors want to see that money being spent?
0:20:25 - Sun
Uh, again, a great question and I think, um, the markets, the markets changed. Like before 2021, I would say investors were a lot, were willing to put in money, to spend a lot more on just getting market share and expanding and growing audience, without necessarily, you know, making sure that you were focusing as a management team, focusing on the top line, on generating revenue, and so they were willing to put an inordinate amount on sales and marketing and customer acquisition. Now I think the pendulum has changed and so, again, I think investors are looking for companies with product market fit, positive unit economics, and then they want to know that management has the vision and the strategy to be able to try to go out and basically build a company and get product adoption around what they've been doing.
0:21:39 - Dmitri
Right Makes totally makes sense. So I we touched briefly on this at the beginning of the interview, but I'm curious if we can just go a little deeper into next steps. For, for our startups that are listening, what are the best ways to connect with investors? We talked about the internet, generally speaking. Are there specific platforms? What do you think of conferences or events? You talked a lot about like getting introduced and so forth? Let's just go a little bit deeper there with that question.
0:22:04 - Sun
I think conferences and events, and even just well, when we say conferences, you know industry conferences they don't necessarily have to be investor conferences, but it's a great way to go out and network. And just LinkedIn is also, I think, a really good way to see. Who do you know in your network, who can I connect with, who will spend, you know, even 15 minutes just having a coffee with me so I can tell them about what I'm doing and maybe they know of some people who can help me out out. I think, you know, going back to your school alumni network is another good way to see, because most schools have investment clubs too, but maybe you can contact, through the alumni office, some other entrepreneurs that have been successful in your area, or they might know of people who could help you out. And really just socially, a lot of times when you get in conversations with people, you mention what you're doing and they're more than happy to try to connect you with somebody else.
0:23:17 - Dmitri
What about Crunchbase? Is that a useful and accurate database for collecting info on investors and accurate database for collecting info on the investors?
0:23:23 - Sun
Crunchbase is a great resource, and Crunchbase can also give you information on who you think your peer group is and the investors that have invested in those other companies.
0:23:39 - Dmitri
Okay, awesome, we're going to take one more quick break and then, when we come back, I want to ask you a little bit about the wider music tech landscape. We'll be right back.
0:23:50 - Seismic Activity
If you're enjoying this podcast, you really need to come hang out with us. How can that happen?
Well, it's very simple Seismic Activity which is our Music Tectonics free online event series. About once a month, we convene the music tech community for networking, discussions and demos by innovators and inventors. So come join us and tune into the tremors that are about to be major shakeups in the industry. See our upcoming topics on the schedule and register for our next event at music tectonicscom. Now, these aren't your usual sleepy webinars. I mean, would you expect that from us? No, of course. Seismic activity is fun, fast-paced and interactive. Anyone who works where music and tech meet is welcome. See you soon.
0:24:36 - Dmitri
Okay, we're back, sun. I wanted to ask you when you look at the music tech landscape or even wider to the media tech or creator economy landscape, how are things looking for investment right now?
0:24:45 - Sun
To be honest, and I don't want to sound like a Debbie Downer, but I think the early stage investment landscape is still challenging. Investments really reached a peak in 2021. And since then, a lot of investors have been just being super cautious and holding their powder dry, not investing a lot. Cycle. They've been taking a harder line, even in terms of their current portfolio companies, in terms of making the decisions uh, right away, okay, these guys aren't going to make it.
You know I'm going to take my dollars and devote it here for these companies, but that bucket is that segment is is fewer in number than they, than it has been, I think, in the past couple of cycles, and then others just have sort of, you know, had to sell or shut down. I think things are starting to get a little bit better but, like I said, there's a lot more focus on positive unit economics, product market fit and I would say even, you know, does this company? What are the real chances of this company getting to profitability within a reasonable time, versus just giving them a long runway to gain market share at the expense of not making money?
0:26:18 - Dmitri
Do you think that investment outlook will shift at some point? Do you have any thoughts on what might shift that outlook?
0:26:24 - Sun
Well, I think there are parts of the subsectors that are getting better. You mentioned the creator economy and there, particularly because we did a report that looked at funding, we came out with our industry report last fall and there that definitely reached a peak in 2021. And I think what you also are starting to see there is a lot of companies that did raise a lot of money. They basically had been hanging on and some of them are now starting to run out of cash and so they're having to decide what what they want to do, like do they want to try to go out and raise more money and have a down round, or do they need to sell?
But I think there's also coming down from the top and I know this is a long way from Series A, but there's still a lot of money out there on the private equity side and also with family offices, and so I think eventually, some of that money's going to flow in and you started to see it in different parts of media tech and a little bit in the creator economy, and that can also then give more money to larger companies who maybe want to make some investments or even make acquisitions, which doesn't directly answer your question, but I do think that those are factors that are impacting what young entrepreneurs should think about now.
So it's possible those private equity and family funds could actually start to feel a little bit more like a Series A. You should consider family offices too, because there are a lot of family offices now that have grown to be large enough to basically act like a Series A investor, not just giving out seed funding, and generally their risk profile is such that seed is probably too early for them. But with family office money, I think what a company or an entrepreneur needs to think about is does that family office have the track record or the profile where there would be money for a follow-on investment, which is what the traditional Series A venture capitalist will typically do for its investor?
0:29:13 - Dmitri
So if you're going to treat a family office as a traditional Series A venture capital firm, you want to make sure they're going to be able to continue to support.
0:29:23 - Sun
I would think about that.
0:29:25 - Dmitri
Yeah, we've heard a lot about that on this series, so that's helpful. Okay, one last question. This has been amazing, super valuable. What do you think things are going to look like over the next year or two? I know you said it's tough. You know there may be sectors that continue to do just fine, but let's, we're in, we're, we're, we're in 2024. What's 2025, 2026. Are we going to do you think? I mean, I know you can't predict the future, that's not necessarily your business, but do you? Do you have any thoughts on sort of where things are going to go over the next couple of years?
0:29:53 - Sun
I I I'm an optimist. I think things will continue to improve this year, although not at a rip-roaring pace, and I think going into 2025, things will definitely improve, but it'll just be more of a slow ramp going towards the end of 2024. And then, looking out to 2025, I'm much more optimistic.
0:30:21 - Dmitri
Cool, awesome Sun. This has been super valuable. Thank you so much for joining us. Hope we can get you out to the Music Tectonics Conference sometime soon. Really appreciate it, thank you.
0:30:29 - Sun
Thank you.
0:30:31 - Dmitri
Thanks for listening to Music Tectonics. If you like what you hear, please subscribe on your favorite podcast app. We have new episodes for you every week. Did you know? We do free monthly online events that you, our lovely podcast listeners, can join? Find out more at musictectonics.com and, while you're there, look for the latest about our annual conference and sign up for our newsletter to get updates. Everything we Do explores the seismic shifts that shake up music and technology, the way the Earth's tectonic plates cause quakes and make mountains. Connect with Music Tectonics on Twitter, instagram and LinkedIn. That's my favorite platform. Connect with me. Dimitri Vitsa, if you can spell it, we'll be back again next week, if not sooner.
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The Music Tectonics podcast goes beneath the surface of the music industry to explore how technology is changing the way business gets done. Weekly episodes include interviews with music tech movers & shakers, deep dives into seismic shifts, and more.
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