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In a nutshell, Series A funding denotes the initial round of the so-called series startup financing. During this stage, venture capitalists and bankers invest in a company that provides proven business concepts, a profit game-plan, and an organized team. Most investors receive preferred stock shares.
As a type of equity-based financing, Series A funding ensures that a startup company will secure the necessary capital from the investors. This occurs by selling the company's shares.
Series A funding is used to ensure a company's continued growth. In this round, attracting new talents and reaching product development milestones are some of the common goals. The company aims to continue its business growth. This way, you can attract more investors, which is essential for future rounds of financing.
In addition to the continued growth of a company, other goals include additional market research, covering the salaries of the people involved, and finalization of product or service to be launched.
Venture capital firms are the Series A round's biggest investors. These firms specialize in investments intended for early-stage companies. Generally, the capital is given to a company in the pre-profit stage but already generating revenue.
After a startup has already established itself with a feasible business model or product, it may still need additional funds to expand. Then, it will look for funding by providing its potential investors with well-detailed business model information as well as future growth and revenue projections.
The funds sought are typically used to carry on with expansion plans. These include new office spaces, hiring additional sales and support staff and programmers, among others.
The potential investors perform their due diligence by reviewing the financial projections and business model. After that, they form a decision to invest or not.
In case these potential investors decide to invest in a startup, they will proceed to the nitty-gritty. They figure out how much they will invest, different investment conditions, and what they will get from that investment.
As an exchange for the investment they made, they will receive preferred or common stocks, deferred debt or stock, or a combination of those. Most investors look for significant returns of money alongside 200 to 300 percent, not an uncommon objective over multiple years.
Series A funding typically comes from professional investors like hedge funds, angel investors, and venture capitalists. Since the investment amounts are high, family and friends rarely invest in Series A funding.
During this stage, a startup company needs sufficient money to grow its operations, pay for office space, hire additional staff, invest in sales and marketing, and handle other elements to help it expand in the market.
Keep in mind that any funding always comes at a cost. In investment funding, which is raised with the help of pre-seed, seed, and series funding, the investors will receive shares of ownership in exchange for money in the startup.
These investors typically receive common stock. Meaning, the shareholder will get voting rights and dividends on par along with other company shareholders with no preferences.
There are also instances that investors, along with pre-seed funders and seed funders, receive preferred or Series A shares. Depending on a company, Series A stocks differ. However, these stocks share all or some of the following characteristics:
To help you understand even better, let's discuss what funding rounds exist.
Funding rounds involve different concepts, including:
In the pre-seed round, startup companies raise the money they need to start any operation. Just like with small commerce, the money commonly comes from family, friends, and personal savings.
The owner or founder has only to pitch himself and his ideas. So, you can seldom see professional investors during the pre-seed round. However, angel investors may still get involved in this stage to help fund the startup.
The first stage where professional investors get involved is called the seed round. This is the stage at which angel investors typically consider investing in a startup company. Venture capitalists also hope to invest early in the life cycle of a project and other development programs.
Family and friends occasionally get involved in this stage, but not often. Even at the seed stage, the company needs hundreds of thousands of dollars. This money seldom comes from the founder's personal savings or investment.
The founder uses the seed round funding to build a company and make a product or service. The seed stage also focuses on improving the product in order to achieve the product-market fit. The startup has to prove that they can build a certain product, make it work, and find a market.
After startup companies have proven that they have a product or service that “clicks” with the market, they will then enter the series rounds of funding. This includes Series A, Series B, Series C, and beyond.
During the series funding, the founder has to prove that their idea has strong market traction. Most investors do not expect that they have already turned a profit until much later on. This stage requires the startups to demonstrate that they only need time and money to achieve success.
Startup companies utilize series funding to scale their operations in order to increase market share and revenue. Venture capitalists, together with other professional investors, make up all of the investment of a company.
Runway refers to the time horizon during which a company can survive with its current cash-at-hand at its current burn rate. For example, a company that has $80,000 at its disposal and spends $20,000 per month has a runway of four months.
Founders or CEOs have to choose the right investors as the decision can impact the growth of their startups. Think of your potential investors as partners. For sure, you want the partnership to go as smoothly as possible.
Don't waste time pitching to investors who are not a great fit for your company. Find investors whose interests and values align with your business.
Scoping out the investment space is a good place to start. You need to figure out who are the active and inactive investors. After that, you can start searching for active investors who invest in the industry you belong to. This will help you find and connect with Series A investors much quicker.
It is essential to know the different ways on how you can get Series A funding. Depending on your requirements, you can get this funding through the following investors:
Venture capitalist refers to investors who are part of the private sector. They are engaged in businesses that expand rapidly, like medical and tech companies.
A venture capitalist investment ranges from $7-$10 million. Most venture capitalist firms play a critical role in startup companies. Note that these firms usually have an exit strategy where they liquidate their assets once they meet certain criteria.
Private equity individuals or firms invest in startup companies by buying shares for partial or total ownership. They have the capability to purchase out a public company, which they can turn into a private business.
Most private equity firms raise funds for investments with the help of third-party investors. These include insurance companies, pension plan firms, charities, and universities.
Similar to venture capitalists, angel investors are known to be part of the private sector. But instead of private firms, they are individuals.
A single angel investment ranges from $25,000-$100,000. They typically invest with an expectation of high ROI. These investors may play a larger role in a startup company as well as request a seat on the board of directors.
When compared to private investors, crowdfunding is far different. It can open up an investment opportunity to the entire public. In terms of business operations, it is a hands-off investment approach.
The founder pitches his or her idea or product and then allows people from different parts of the world to donate money. Although crowdfunding tends to be a grassroots approach, many companies can raise millions in just one month.
With Small Business Administration (SBA) microloans and micro-lenders, a startup company receives a smaller investment. The SBA, which is a government entity, provides a program connecting small businesses to private lenders. A single loan can reach up to $50,000.
There are also non-profits microlenders offering loans of $12,000 on average. Small startups that need seed money can take advantage of microloans. However, this investment still varies from one case to another.
If you want to have total control of your business, make sure to clearly state the desired relationship in the terms of a loan agreement.
For a startup company, receiving Series A funding is already a great milestone. This fund provides a company a couple of years of runway to develop a team and a product and start executing its go-to-market strategies.
In addition to the different ways of getting Series A funding above, the following things will also help:
About one-third of startup companies that raise funding go through an accelerator program. In fact, these accelerators somehow represent 10% of all the Series A round. Mind that the primary factor evaluated for acceptance into the leading accelerators is the company team.
When a startup company raises Series A funding, its network is essential. While you can join the top-tier accelerator to get the best statistical opportunity to win Series A funding, these groups only accept two percent of the applicants.
Startup companies that get funded without going through the accelerators oftentimes succeed because of early networking. For instance, they did it with influential investors, be it VCs from top venture capital firms or angel investors.
It is a good idea to continue leveraging and nurturing the micro-VC and angel connections before you think of pitching these investors. A founder can take as many new meetings as he or she can handle. By nurturing and extending a genuine relationship before the Series A funding, your startup can dramatically increase its odds.
Many startup companies, including those that successfully get seed-stage funding or angel funding from incubators or accelerators, cannot secure follow-on funding.
The good news is that there are easy ways to maximize the chances that you will get the desired Series A funding. Take a look at the following tips:
When getting started to raise Series A capital, make sure that your startup is Series A ready. Some of the key factors in evaluating the readiness of your company are promising unit economics, quality of the team, proof of business model, revenue, customer acquisition readiness, systems to support scaling, and product-market fit.
Raising a fund is a time-consuming process, so you need to create a realistic timeframe. It is advisable to start the process about 7 or 8 months prior to starting to raise Series A funding.
Mind that the deal process consists of two parts: pre-term sheet and post-term sheet. When you underestimate the time required, you might need to change your funding strategy. You may even need to raise a bridge round just to sustain your business.
You can take as many meetings as possible and talk to other founders that succeeded in raising Series A funding. Then, apply their input to your pitch.
For starters, meet low priority investors. As they ask relevant questions and give valuable feedback, you can incorporate that in your pitch. After that, you can meet top priority investors.
As you approach multiple venture funds, you can get a competitive dynamic in winning the Series A funding. Keep your conversations with the potential investors moving and observe consistency. Then, make sure to negotiate at a high bargaining power to have a better valuation and deal terms.
Always stay up to date with the common deal term offers for series A funding. There is a great possibility that the term sheet's first version you receive is not founder-friendly. So, the best thing you can do to protect your interests is to stay updated on the standard market practices.
You can shorten the transaction closing time by keeping all your paperwork in place for due diligence. Make sure to update the legal compliance, as well as other documentation of your company. Your team should put together all the records associated with corporate structure, employees, client contracts, past financing, cap table, intellectual property, and more.
All your paperwork should be well-organized and ready for review by potential investors.
It is essential to ensure that the Series A deal terms are consistent and align with the business trajectory. When it comes to creating future fundraising, the terms for series A play a critical role. Make sure to get these terms right the first time around.
Right after the seed round, your next big step is to win Series A funding. It is the first significant round of venture capital funding of a startup company. With this kind of funding, you have a better chance of continuing the growth of your business and reaching success.
In addition, series A funding helps with developing new products and attracting new talents.
We hope that you have a better grasp of series A funding and related activities. If you need additional help, check out our coaching and mentoring services and courses.
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