A year agoDeveloper-focused software companies have been fueled by large valuations, with blockbuster IPOs such as Snowflake, HashiCorp, and Confluent. Now, with the market downturn, it’s even harder to raise capital for dev-tools startups. But it is not impossible.
After founding hundreds of developer tools startups and talking to several fellow investors over the past several months, I’ve noticed one common trait among founders who have raised successful Series A rounds: They’re good at telling their company’s story. Of course, raising capital takes more than just words, and in this column, I’ll delve into the practical.
Before we begin, it is important to set expectations. The average Series A for dev-tools companies is falling, and valuations are down across the board. The average Series A round for a developer tool company was $47.5 million in Q3 2022, the lowest since early 2021.
A seed round is initiated to confirm a problem and create an early solution. Series A rounds are used to bring a solution to market, nurture a few customers, and see the first signs of monetization with that solution. As an investor in many developer-first businesses, including Docker, Redis, and Startree, these five metrics are what I look for.
In most technology-first companies, developers are in the driver’s seat, and capturing their input can greatly increase GTM efficiency.
User development
The most important metric VCs want to see is the indirect organic growth of your product’s user base, including the expansion of usage within specific groups. So try to provide at least one month’s worth of weekly and/or daily data.
If you’re running an open source company and user count is hard to do with this tool, show usage growth through proxies like downloads or product engagement instead.
Remember, not all users are equal. A company whose users seem stronger than modern, engineering-first companies like Robinhood, Confluent, Databricks, and Airbnb.
Income
Revenue is taking an increasingly important role in Series A fundraising conversations. It’s not the amount of income that matters, but the quality. Constellation Series A can be raised at $100,000, $500,000 or $5 million ARR. Investors point to current earnings as a leading indicator of what your company’s earnings will look like as it grows.
