Simple Guide to Series A Funding
Series A Funding: Critical Step for Startups
Series A funding is the second round of investment in a startup company, following seed funding. It is typically led by venture capital (VC) firms and used to finance the company's growth and expansion.
To raise Series A funding, a startup must have a viable product or business model and a strong management team. The company will also need to provide potential investors with detailed information on its financial projections.
Series A investors are typically looking for startups with the potential to generate significant returns on their investment. They will also want to have a say in the company's decision-making.
Series A funding can be a critical step for startups that are looking to scale their operations and grow their market share. Typically, the funds sought would be used to proceed with expansion plans (hire additional personnel, programmers, sales and support staff, new office space, pre-seed pay outs and the like). The potential Series A investors will then perform their due diligence (such as reviewing the business model, financial projections, exit strategy, IP rights, market analysis, etc) and then form a decision about whether to proceed with a term sheet and invest.
There are a number of way to structure a deal for investors. Although, more often than not, Series A investors will receive preferred equity. These stocks share all or some of the following characteristics:
Preferred voting rights when it comes to company decisions
Preferred dividend payments over the common stocks, so the shareholders will get paid first
Higher dividend payments over the common stocks
The investment is premised on the valuation of the company, how much it is worth, and how that valuation may change over time. Most Series A investors are looking for significant returns on their money, with 200% to 300% not uncommon objectives over a multi-year period. 18-24 months of runway is common at this stage.
"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 $240,000 at its disposal and spends $60,000 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 certain, 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. This investor list needs to be as procured and targeted as humanly possible. If not, you can find yourself drifting for months on end, spinning your wheels and wasting precious time, energy and resources on investors that are not the right fit for your company.
Series A funding is used to ensure a company's continued growth. In this round, attracting new talents, reaching traction (and/or sales) and 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.
After startup companies have proven that they have a product or service that “clicks” with the market, proving that their idea has strong market traction.
Example of a Series A financing round
ABC, a startup that has developed novel software for investors, has raised $20 million in Series A funding. The funding was led by several VC funds, who were impressed with ABC's business model, projected revenues and management team.
In exchange for their investment, the VC firms will receive a 50% stake in ABC. They will also gain seats on the company's board of directors.
The funding will be used to finance ABC's growth and expansion. The company plans to hire new employees, develop new products and enter new markets.
ABC's Series A funding round is a sign of the growing interest in startups that are developing innovative solutions to real-world problems. It is also a sign of the confidence that venture capitalists have in the company's potential to succeed.
Exit Strategies
Venture capitalists are increasingly scrutinizing startup exit strategies before investing.
Investors want to know how they will get their money back and when, so they are looking for startups with clear and achievable exit plans.
A thorough financial projection is essential for any startup seeking funding, and investors will pay close attention to the assumptions behind the model, as well as the pro forma financials, return on investment analysis, sensitivity analysis, and cash sources and uses report.
Investors also want to see that the financial projection is prepared with monthly level detail, as this allows for monthly cash shortfalls to be identified. This is a step that founders and CEO's cannot overlook.
Summary
Series A funding is the second round of investment, typically led by venture capital (VC) firms and used to finance the company's growth and expansion.
Startups that are looking to raise Series A funding need to have a viable product and complete business model, a strong management team and a clear vision for their company's future. They will also need to provide potential investors with detailed information on their financial projections and exit strategy.
Series A investors are looking for startups with the potential to generate significant returns on their investment. Be realistic about your financial projections and willing to negotiate with investors including the proposed deal structure. However, be prepared to pitch your business to a number of investors before settling down on the right one. The right partnership is just as important as the capital investment itself, so be patient!
Although raising Series A funding can be a challenging process, it is both essential and rewarding for startups that are looking to achieve their ultimate business goals!
