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5 metrics Series A investors look for in dev-tools startups • Technology Flow

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A year ago, developer-focused software companies are being funded at huge valuations with expected blockbuster IPOs like Snowflake, HashiCorp and Confluent. Now, with the market downturn, raising capital for a dev-tools startup is very difficult. But it is not impossible.

After meeting hundreds of developer-tools startups and talking to dozens of fellow investors over the past few months, I’ve noticed one common trait among founders who have raised successful Series A rounds: They’re great at telling their companies’ stories. Of course, raising capital takes more than a path with words, and in this column, I’ll look at a practical, step-by-step guide entrepreneurs can use to successfully move from seed to Series A.

Before we begin, it’s important to set expectations. The average Series A price for dev-tools companies is falling, and valuations are down across the board. The median Series A round for a developer-tooling company was $47.5 million in Q3 2022, the lowest level since early 2021.

Seed rounds are raised to validate the problem and create an early solution. Series A rounds are used to bring a solution to market, get a few customers interested, and see early signs of monetizing that solution. As an investor in several developer-first businesses, including Docker, Redis, and Starttree, I look for these five metrics:

Developers are in the driver’s seat at most tech-first companies, and capturing their imaginations can dramatically increase your GTM efficiency.

User growth

A metric VCs want to see is the non-linear organic growth of your product’s user base, including usage expansion within specific teams. So try to provide weekly and/or daily data for at least one month.

If you run an open source company and user numbers are hard to measure, show usage growth through proxies like downloads or product participation instead.

Remember, not all users are created equal. The company looks strong if its customers are from modern, engineering-first companies like Robinhood, Confluent, Databricks and Airbnb.

revenue

Revenue is playing an increasingly important role in Series A fundraising conversations. It’s actually not the amount of revenue that matters, it’s the quality. You can raise a stellar Series A at $100,000, $500,000 or $5 million ARR. Investors point to current revenue as a key indicator of what your company’s revenue will look like as it grows.

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