A Series A funding round can be seen as the second formal capital raising event — after seed funding — of any startup, which is why it is given the letter A.
It commonly follows other less formal financing rounds such as seed-capital funding rounds in which family, friends, or fools give founders some money to develop a prototype or establish proof of concept for the business.
The purpose of a Series A funding round is to inject significant liquidity to either help the company in monetizing whatever it does or to further develop the product or service until it reaches the point in which it can be launched.
That said, the actual use of the funds obtained through a Series A capital raise may vary significantly from one business to the other.
In earlier stages, most of the investors come from the founder’s immediate circle. However, in a Series A capital raise, investors are usually of the institutional type which includes venture capital firms, angel investors, or even a family office — an investment fund that manages the wealth of a high-net-worth individual or household.
Series A rounds vary in size, commonly in a range from $3 million to $15 million, and they are a crucial step in the life cycle of any startup since failing to secure money from a Series A could delay the timeline of the project significantly or might even sidetrack the founder’s effort to lift the project off the ground.
If you are currently struggling to understand what a Series A is and how it works you should keep reading as I will dive into the details without being overly technical about it.
When are companies ready for a Series A?
Companies should start thinking on a Series A funding round after their product or service has reached a more mature stage.
At this point, a product or service should already have a clear value proposition, a price point, a potential market, and a delivery method, among other things.
You should be able to answer most — if not all — questions related to how the product works, what it does, why is it better than others, and what kind of value it creates for prospective consumers.
On the other hand, the company should have been able to bring some money in through sales, cash advances, or at least it should have secured a purchase order from a serious buyer.
Metrics also play a key role at this stage, as investors will ask questions regarding the number of clients the company has, how many products it has sold, how many users have subscribed, or how many of those users have been retained and for how long.
Actual metrics, of course, vary from one business to another, but ultimately they should show that there’s a market out there that has already shown interest in the company and what it has to offer — which is why the business needs more capital to keep growing.
That said, successful Series A funding rounds can be achieved despite not reaching profitability just yet.
In fact, many businesses manage to raise a lot of money through Series A rounds although they might be losing significant amounts of money, as investors are willing to cover the cash burn while the demand picks up and the business reaches its critical mass — the point in which it is large enough to start being profitable as a result of economies of scale.
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How much money should be raised?
Series A money is usually destined to grow the business.
With that in mind, founders seeking Series A money should focus on things like marketing, sales team development, and other similar strategies to raise awareness to increase sales, number of customers, or user base.
Operating expenses like rent, salaries, and general supplies are also important at this point, as new staff will have to be hired and this means funding will be needed for the next 12 months as the business revenues are probably not enough to sustain its organizational structure at the moment.
The amount you aim to raise through a Series A should already incorporate these expenses along with other critical ones including legal fees, the founder’s compensation package (if any), and any other similar items and any major capital expenditures you intend to make.
How Series A rounds are structured
Series A rounds are usually equity funding rounds. This means that founders will have to give up a percentage of ownership to bring in investors.
However, it is possible in some cases to structure the deal in a way that doesn’t dilute the founder’s stake that much. This can be achieved through the issuance of both common — with voting rights — and preferred — non-voting — shares.
Preferred shares could also have a convertibility featured attached to them to increase their appeal as — let’s face it — no investor counts that a startup will be capable of paying a high fixed preferred dividend.
A valuation of the business is needed at this point, which might be a bit challenging, especially if the business has not generated earnings.
Before presenting to investors, you should understand how much your business is worth not just based on how much it makes today but also on how much it might be able to generate in the next 5 years.
Once you have a number, you should be able to explain to someone easily why and how you have arrived at such number. In most cases, a range of valuation multiples on sales or EBITDA are used to arrive at a valuation.
In other cases, like subscription-based businesses, a value might be assigned to each user — current or forecasted — and that could be an alternative way of valuing the company.
Finally, in some rare cases, investors might prefer convertible debt instead of equity — although this is not standard practice.
How to pitch to Series A investors?
Since a Series A funding round is a formal event, you should prepare adequately for it.
This involves gathering all the necessary information about your business including its key operational metrics, financial statements, forecasts, market research reports, and any other important data you would like to communicate during your interactions with potential investors.
All this information can be summarized in an investment pitch deck — usually a PowerPoint presentation — in which you will describe everything about your business and why it is a good opportunity for those who will be listening.
The potential of your business to scale and deliver attractive returns for venture capitalists and other investors should be the most impressive feature of your presentation. Although you might be passionate about your business, these investors are on the lookout for money-making companies, not just good ideas.
Where to find Series A investors?
Series A investors are commonly of the institutional type, although certain independent individuals may also show interest in your pitch deck once you start putting your name out there.
If you are struggling to find potential investors, you should start by approaching the closest link you have to the VC industry or a potential investor — like your accountant, financial advisor, other founders, etc. This person or contact could serve as a bridge through which you will connect with your Series A investor.
Moreover, you could attend certain events in which networking opportunities are promoted, even better if the event is specifically related to your business’ industry.
Some companies can also help you in securing the capital you need through a Series A round as they already have the industry contacts and can introduce you to the investors that will be most likely interested in your company.
If you are contemplating the idea of raising money through a Series A capital raise you should understand how it works and you should also get proper counsel on which is the most ideal structure for your business in particular.
Once you have understood the intricacies of these funding rounds you will step into meetings with more confidence and you will probably be able to land a deal more easily now that you know what investors are looking for.