- By SeedInvest
- August 10, 2022
- 7 minute read
Startups that show success in their early stages often need more money to continue growing the business. This is where Series A, B, and C fundraising rounds come into play. In this piece, we’ll learn about the most important aspects of Series A fundraising such as:
- What it is
- How it works
- When Series A funds should be raised
- How much you should raise
Most startup founders begin their fundraising journey by tapping external sources for an early infusion of capital to get their idea off the ground. This is what’s known as Pre-Seed funding, sometimes also called a friends-and-family round. It’s the earliest stage of the funding process, and true to the name, is typically raised from close associates, friends, family members, and people who know the founders directly.
If initially successful, companies will usually move on to Seed funding. This money typically comes from angel investors and may allow the company to hire a small staff or establish a marketing plan.
Pre-Seed and Seed funding are both critical for any early stage startup, but they can only go so far. Eventually the company will likely need additional funds and have to move on to a Series A to support their growth ambitions.
However, this can be a challenge for many young companies. Because the amounts raised in Series A rounds are often well into the millions of dollars, the stakes are higher than in any previous rounds. This means a company needs to have a track record of success to make the transition to Series A. According to Forbes, as many as 90% of new businesses and startups fail in their first few years. Investors know the failure rate is sky-high, so they usually want to see signs of significant traction before writing any checks. To attain Series A funding, investors may be looking for things like:
- An established user base
- Consistent revenues, even if the business is not yet profitable
- Steady improvement in performance indicators like user and revenue growth
How Series A Financing Works
Series A financing is intended to provide companies that have demonstrated high growth potential with the funds they need to continue growing the business. For example, if a company wants to build out its office space, expand to a different geographic region, or develop additional products, Series A funding can put them on a path to achieving those goals.
To start the process, startups usually reach out to specific investors and share their business model with them. Most companies will develop an investor prospectus that outlines the nature of the business, provides key data on revenue, customers, and operations, and details how funds raised in the Series A will be deployed.
Interested investors will then engage in due diligence, where they perform their own research into the company to ensure founders’ analysis on future prospects of the business aligns with reality. For example, does its business plan make sense? Are its financial figures realistic, and how quickly can it scale production or attract users?
Series A funding may come with additional incentives for investors not found in Pre-Seed or Seed funding rounds, like a seat on the Board of Directors or preferred stock.
Series A Investors
As companies progress beyond the Pre-Seed and Seed funding stage, they’re usually laser-focused on things like developing new products, hiring more staff, and growing their customer base.
These costly endeavors require a larger pool of capital than is typically raised in early rounds, which is why friends and family tend to bow out at this stage in a company’s life. As such, Series A funding usually comes from professional investors or wealthy individuals with deep enough pockets to keep the money flowing. Series A sources often include venture capitalists, hedge funds, and even family offices.
When Should You Raise Series A Funding?
Founders should start to think about Series A funding once the business is on track to meet certain key milestones set out during previous funding rounds, like progress on a minimum viable product (MVP) or hitting specific user growth or revenue targets. Pursuing Series A funding too early may distract founders from laying this initial groundwork, and might even signal to investors that fundraising is taking priority over building the business.
On the other hand, waiting too long to pursue Series A funding could lead to capitalization issues for a fledgling business, making it difficult to pay suppliers and employees or fund product development.
Startup founders should consult their existing investors on when to raise a Series A round, and feel confident they can show real traction and progress in growing the business before taking that significant next step in funding their business.
Don't Ignore Due Diligence
All startups looking for Series A investment should expect to go through a due diligence process in which potential investors examine the founder’s credentials and past performance, as well as financial information about the business to make sure things are on track. Here are some key points for founders to consider as they prepare to seek Series A funding:
Hire a professional accountant.
Sloppy or disorganized financial information is almost always a red flag for potential Series A investors. Hiring an accountant can help avoid any issues. In addition to keeping financial information neat and tidy, a professional accountant can also help founders gain a better understanding of how the business is performing, helping them make a more detailed and compelling case to new investors.
Be clear with investors.
We’ve all heard the phrase “honesty is the best policy.” In the world of Series A funding, this statement certainly applies. It’s important to be clear with your investors about the milestones your company has achieved or is working to achieve. Let them know about any prior investments so they have a better idea of your firm’s financial history, and make sure they’re clear on cap tables. This will give them a more complete understanding of what’s at stake should they decide to become involved in your enterprise.
Watch your burn rate.
Investors know you are coming to them because you need funding for your business. However, they’ll also expect you to be responsible with any capital they provide, and any that you’ve raised before seeking Series A funding.
Your startup will need operating funds to keep things running while you’re pursuing your next round. Investors will want to see that you have enough cash on hand to ensure founders are free to spend the necessary time pitching potential investors, negotiating, and signing deals without needing to take unfavorable terms because the company is running out of runway.
Maintaining a cash reserve of several months to a year while seeking Series A funding will help give investors confidence that the business is well managed and plans effectively for the future.
How Much to Raise
Most startups will raise between $2 and $15 million in a typical Series A round, though some might raise as much as $40 to $50 million. It all depends on your company.
In some cases, founders may need to allocate as much as 20-40% of the startup’s equity in the funding process, though this will depend on many factors including the industry, the current size of the business, and prospects for growth. It’s best to have a figure in mind for how much you’d like to raise and how much equity you’re willing to give up in exchange before initiating the search for Series A funding.
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