Series A Funding: Ultimate Guide to Raising your Series A Round
Last Updated: 1/3/2023
Series A funding round can be seen as the second capital raising event — after seed funding or the first round of VC funding — of any startup, which is why it is given the letter A. If you are raising capital, this article is for you.
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. Seed capital is considerably less than venture funding and only a fraction of seed funded companies go onto a Series A.
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 (E.g. seed funding), 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 compared to earlier seed funding, 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 about a Series A funding round after their product or service has reached a more mature stage, many of which have already received seed funding to get to this 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, the specifics depend on the venture capitalist.
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.
At this stage what investors want to see is the business's ability to quickly scale up in terms of users, sales, retention, and other similar areas. That way, they will be interested in the long-term story rather than in the short-term results the company has generated so far.
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How much money should be raised?
Series A money as a stage in venture capital is usually destined to help realize your business model and is injected by venture capitalists.
With that in mind, founders seeking Series A venture capital 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 determined by your corporate finance or leadership team 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 for startup funding are usually equity funding rounds and often grant preferred stock (rather than common stock). 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 (common stock) that much. This can be achieved through the issuance of both common — with voting rights — and preferred — non-voting — shares.
Preferred stock could also have a convertibility feature 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 a number. In most cases, a range of valuation multiples on sales or EBITDA is 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. Pitch decks are used from seed funding through to Pre-IPO and private equity.
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, unlike earlier seed funding investors, are commonly of the institutional type like venture capitalists or to a lesser extent private equity firms, although certain angel investors 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.
Finally, equity crowdfunding can also be an option. The advantage of equity crowdfunding is in some cases, better terms can be received. However, equity crowdfunding is a much more laborious process considering the volume of investors added to the cap table, whereas venture capital firms tend to fund faster and simpler.
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.
Bottom Line
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. If you don’t meet all the criteria, try considering seed funding instead.
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.
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