Series A funding or "series A investment" is the second stage in the funding process a startup goes through. Series A rounds come after seed funding and is traditionally the first stage during which venture capitalists become involved. Although VC firms can become involved during many stages in the funding process, we will particularly focus on Series A funding, meaning to raise startup capital. This is done with the purpose to generate success for the company, as well as to ensure that milestones are reached. This being said, investors are looking for more than just promising ideas - they want to see companies with strong strategies for future growth opportunities and who can make a dynamic market impact.
Series A investment, much like seed funding, is based on selling equity shares. This means that capital is raised by selling a certain amount of ownership percentage. The benefit is that, as the company continues to grow, the value of ownership stakes increase. Meaning that, even if founders "sell" ownership stakes, they generate more capital from a smaller percentage of shares.
The common purpose of raising series A funding is to make product development happen and to invest in the company's workforce through talent acquisition. The intention is to achieve sustainable, and preferably exponential, growth. This is beneficial for future funding rounds.
It is common practice for early stage venture capital firms to invest during the series A investment stage. In this case, capital is usually given to promising startups who already experience revenue generation but that are not profitable as of yet.
If you're new to the funding process, it's easy to get confused with what is meant by series A, seed funding and so on. The main note to keep in mind is that each stage of the funding process has different goals to achieve and milestones to meet. Let’s look at the difference between Series A and the Seed Round:
When a startup enters the series A funding round, it means that they have a solid business plan and model in place (developed during the (pre-)seed round) - in order to convince venture capital firms or investors to purchase equity in the company. Series A rounds are usually highly competitive, so raising capital will require startups to show great promise of revenue generation and scalability.
Securing venture capital during series A has become more common practice than in the past. This is because more VC firms have become increasingly interested in early-stage investments than they traditionally were.
Seed funding, or just ‘seeding’, is the first official round in the funding process. It comes right after the pre-seed stage and before Series A. The key essential of the seed funding round is to get a company to the stage where they can start executing their business model during the following stage - being series A.
During the seed round, the startup is still in the planning stage, without a fully set product-market fit. This means that investors chose to invest capital in the company, based on future forecasts and estimated revenues because a lengthy sales history is not yet available.
As every startup and new company have their own unique goals to achieve, there's no "one size fits all" answer to when a company is ready to raise typical series A funding. However there are some indicators to follow, based on the type of company and the industry you're working in.
The first clear indicator will be if you've met your seed round's milestone and enough time to comfortably implement the goals you had in mind for the funds. However, getting the timing right remains one of the biggest challenges companies looking to secure round A funding faces.
When planning to raise series A funds, a good method to follow is thinking of a horizontal axis. The ‘diagram’ is a rough interpretation of the progression of your startup - from an idea to a functioning, scaling business. At each point in the life of a company, investors look at the evidence of everything that the company has achieved up to that point. That evidence strongly informs that investor’s decision. The further you go in the fundraising process, the more investors will look at what has actually been achieved with the capital raised, thus your actual metrics
Most seed rounds get raised based on the quality of the founder(s)’ story that they are able to tell about their company and the future it will create. By the end of Series A, founders would have needed to accomplish a significant set of milestones that prove their ability to achieve sustainable business growth.
It’s usually the case that startups are ready to begin their series A raising 12 to 18 months after the completion of the seed round, depending on the outcome of the previous funding rounds.
Again, the total sum to raise will depend on the nature of the company, what they intend to achieve and the industry they're operating in. For example, high-tech industry valuations greatly influence the capital amounts that can be raised.
In determining how much capital to raise, founders are trading off several variables, including how much progress that amount of money will purchase, credibility with investors, and dilution. On average a dilution of 10-20% will occur, raising a series A round. Above all, the amount you aim to raise has to be tied to a credible business plan.
A version of a believable plan is, for example, the "accelerator plan" where more capital than needed is raised to ensure you can capitalize on all market opportunities.
To determine a fair equity share, the company will have to negotiate a formal valuation. This sets the market value of the company’s stock. From here, investment agreements with investors should be drawn up. Important to note is that not too much equity should be sold. Therefore, startup founders and investors should have a mutually beneficial agreement, with regards to investments and expectations.
As a general rule of thumb, companies can raise anywhere from € 3M to € 10M during the series A round. It’s important to keep in mind that the capital range has become very context dependent within markets. This is why it’s greatly important to evaluate the nature of the company and that of the industry when making decisions about capital raise.
In preparing to raise series A funds, there's some key aspects founders should consider before getting into raising series A. It can be a daunting task to prepare for fund raising rounds, however, if you have the metrics to back up your company’s growth and profit potential - you're already in a good position to have a successful series A capital raise.
It's critical to work diligently and to pay attention to vital elements that make up the process of series A fund raise. Before we get into some of the noteworthy points, it's good to know that raising startup venture capital is highly competitive, this led to the implication that startup founders experience heightened levels of investor expectations.
The longer a company has been in business or if founders are not good at persuasion, the more concrete the metrics of the particular business needs to be. Part of the challenge for companies that have raised a significant amount of Seed money is that the requirements they face for Series A are significantly higher than for those who raise less. These companies generally wait longer for their As, so investors expect to see associated progress.
Let’s look at some key tips to follow:
Not only should you time the start of your series A round well, a clear timeline should also be set. The average series A fund raise will last anywhere between six and twelve months, this includes the preparation of the documents. As each new company’s trajectory is different, there’s no “one time” timing model to follow. As a general rule, a company can start a series A capital raise when it’s validated that there’s a problem to solve and they can demonstrate demand for the solution.
Note that, It’s good to prepare for at least 3 months of fundraising. Also, factor in the months it takes to build a solid pitch deck (1 to 2 months). In light of this, start thinking about fundraising when you have 12 months of runway left. This gives you preparation time to a few months of preparation to launch when you’re at 9 months of runway.
Typical series A funding will require you to greatly research the VC’s you want to pitch to. Knowing what companies they usually invest in and their business orientation will help you in personalising your pitch to the specific VC firm. This will also help determine if the venture capitalist in question is a good fit for the company.
You also don’t want to over sell yourself when reaching out. Generally, startups can follow the 30-10-2 rule. Find a way to get warm introductions to 30 potential investors. From there, 10 are likely to want to meet you and 2 of which might want to invest in you.
This is useful to remember when structuring your proposal for series A venture capital funding. In demonstrating product-market fit, you will need to, for example, compile a cohort analysis; show retention curves; organic adoption; etc. This is the stage where most startups start to show data that backs up the viability of their products or services in the market.
Data is a critical component of showing, not only product-market fit, but also in demonstrating that the company is results-driven.
Your brand narrative is one of the key elements in successfully conveying your unique selling point. Venture capitalists want to see the data and research you've built your business model on, however, you want to convince them to invest via the compelling story you share about the company. This adds value to the data and statistics that support your business growth journey.
Keep the pitch short and focused, placing emphasis on the key goals you set out to achieve. A pitch deck should be a short and appealing summary of your entire plan. For example, focus on your key point - the most important message you want to get across, then have all your supporting data in an appendix within the deck.
The goal is to leave a lasting impression of your expert knowledge, business and analytical skills, as well as demonstrate the unique insights the company holds.
Social proof demonstrates target audience success, meaning that the ideal market you’re targeting supports your product/service offerings. This is a prominent signal investors pay attention to. You can, for example, collect testimonials from business advisors and previous investors you’ve worked with to support the data collected from prospective customers.
These are only a handful of the factors to take into account when preparing to raise series A capital. There are many other considerations to keep in mind, however, the most important note is that you should have a healthy amount of data available that demonstrates the long-term success of your business.