Running a startup is a game of balance. Product development, marketing, sales, and operations all clamor for your time and attention. What often throws everything out of kilter is fundraising. At its best, fundraising is challenging. At its worst, it’s downright exasperating.
While every fundraising stage is difficult and tricky to navigate, each stage is critical and distinct in its goals. After you have validated your idea, developed your product, and generated seed revenue, you’re poised to start your startup’s growth phase. This is where Series A financing comes in.
In this post, we provide an overview of Series A financing, help you determine when your startup is ready to begin a Series A round, and offer you tips about getting started.
Overview of a Series A
Compared to seed capital, a Series A is:
Larger. Series A rounds generate at least $10 million. They often exceed $100 million. In 2020, Series A rounds generated an average of $15.6 million. For the same period, the average seed capital investment per startup was $2.2 million. The magnitude of a Series A is one factor that makes it more complicated to accomplish than raising seed capital is.
Funded by lenders with deeper pockets. Your seed money may have included several small investments by your parents, your siblings, and even a few cousins, aunts, uncles, and neighbors. Series A funds typically come from people or companies whose business is lending money to other companies. The increased magnitude of the funding limits the number of investors willing or able to participate.
Later. A Series A round typically comes after the product or service is developed, and the startup is generating revenues, but not necessarily profit. (In the next section, we discuss the indicators that signal when your company is ready for a Series A.
Geared toward growth. Capitalists investing Series A monies into a startup are expecting growth–lots of it–over several years. Their funds allow a startup to scale its operations by hiring more employees, purchasing more inventory, and investing in more equipment. Returns of 200%-300% are not uncommon if the startup grows as expected.
Risky. Series A financiers invest millions of dollars in companies that are still in their infancy. The likelihood of failure is significantly higher than the odds are that this startup will be the next wildly-successful corporate giant. To offset the risk, Series A investors typically negotiate ownership rights into the contract. Often, they receive a significant–or even controlling–interest in the startup, include an anti-dilution clause in the contract so that they can maintain their percentage of ownership, and earn a seat on the company’s board of directors.
How to know you’re ready for a Series A
There are no “10 Commandments of a Series A” that dictate when your startup is ready. However, the following list presents the basic requirements.
Your firm is probably ready for a Series A when:
What you’re doing is working, but you need cash to be able to grow. First, this means that you understand your market. You know where your product or service fits in the marketplace. You also understand who your primary competitors are and have identified a competitive advantage that allows you to meet a need more effectively than they do. Additionally, your business model is scalable and adaptable; it enables you to react quickly to market changes once you acquire funding.
Second, you’re usually already generating revenue from your product or service and garnering new customers. A few startups go to a Series A before their product is viable, but most have solid–albeit short–track records that provide direction for the future.
You have your paperwork in order. Think broadly here. Meeting this requirement means that you can provide documentation for your business itself and verify that you comply with all industry regulations and standard practices. Additionally, to be compelling before a potential investor, you’ll need a complete presentation of your business model, relevant financial documentation, a thorough market analysis, and details about how you’ll utilize the funds you receive. If you can’t provide thorough records, your Series A funding round may grind to a halt before you have the opportunity to actually pitch your company to an investor.
You understand and can accept the ramifications of a Series A funding round. The most obvious result of a Series A is that you, as a founder, no longer have full control of your startup. You may have only a minority interest in the company you started. As shareholders and/or board members, your investors will influence the direction of the company. They will also weigh in on major decisions. You’ll need to accept this.
Another ramification of a successful Series A round is that you’ll suddenly have lots of funds at your disposal. Unless you have a realistic plan for utilizing the funds and a series of checks and balances on the disbursement of the money, you may not get the maximum amount of utility from them and inadvertently put your firm in a catch-22 if future funding rounds are necessary. Current investors will hesitate to invest more funds if their initial investment isn’t achieving maximum results. Furthermore, future investors will certainly investigate how you used previous funds and what return you earned from them. The point is simple: you’re not ready for a Series A unless you have a finely-honed sense of fiscal responsibility and a solid plan for using other peoples’ money carefully and wisely..
You can couple your facts and figures with a compelling narrative. You may think you’re ready to begin a Series A once you’ve completed the first three steps, but you’re not. Humans are hardwired to appreciate a story. We want to know the “why” as well as the “what,” and “when,” and “how.”
Before you approach a potential investor, you need to craft a compelling story. Potential investors want to understand your motives in starting your company and the mission you’re trying to accomplish. Your story needs to resonate with people in a way that convinces them that your concept merits further consideration. Without that component, your presentation will likely be just that–a presentation of facts, figures, and analysis that omits a key aspect that humans really want to know before they sink funds into a company.
You learn to deliver your startup story with a persuasive pitch. This step is often the determining factor between the startup that gets the interview with the potential investor and the one that actually receives the funding. To be successful with a Series A, you must tell your compelling story effectively. Most people–founders and CEOs included–don’t deliver a strong pitch persuasively the first time. Doing so requires deliberate preparation of the pitch, repeated practice, and the fortitude to allow others to critique your pitch before you present it to a potential investor.
Our list of requirements isn’t exhaustive; nor does checking off each item on this list guarantee that you’re absolutely ready for a Series A. However, completing these 6 steps means that you’ve considered your firm’s strengths and weaknesses. You’ve analyzed market opportunities and considered possible threats that could arise. In short, you’ve done your homework.
How to get started with your Series A
Once you’re ready to begin a Series A, you’ll need to pursue the investment sources that fit your company best. The range of options includes people in your primary and extended network, traditional investors, and a growing number of non-traditional options.
Often, leveraging your network is a good way of securing Series A capital, especially if you’ve nurtured relationships with seed-money investors who have connections with other angel investors or VC firms. This option is attractive because it’s a grass-roots approach and doesn’t require you to start from ground zero. Your network already knows you. Potential investors in your extended network already know of you, thanks to their connections with people in your primary network.
Traditional private-sector investors
Traditional private-sector Series A investors include venture capitalists, private equity firms, and angel investors. Distinctions between the three groups include whether the investors are individuals or companies, the amounts they invest, the industries they typically invest in, their primary motive for investing, and their exit strategy.
Here’s one caveat before we discuss these 3 types further: We’re presenting broad statements that generally hold true. Exceptions exist. You’ll probably find some in the course of your Series A funding.
Venture capitalists often represent a group of investors. Their pooled funds allow them to invest larger amounts, often in situations that have higher risk and the potential for greater returns. In the past, VCs have preferred high-tech firms or companies set to disrupt their industries. Again, exceptions exist, but this is generally still the rule.
Private equity firms also represent a group of investors, but often the investors are companies rather than individuals. As such, private equity firms have the deepest pockets and typically invest more than VCs or angel investors. While all 3 types of investors perform due diligence before investing, PE firms place more stress on key financial performance metrics such as cash flow, IRR (internal rate of return), and EBITDA (earnings before interest, taxes, depreciation, and amortization.)
Most angel investors are individuals. Many are retired entrepreneurs with a keen desire to see other entrepreneurs succeed. As a category, angel investors usually invest earlier than VCs and PEs, contribute smaller amounts, and look as closely at the key personnel in the firm as they do at financial metrics..
The 3 groups share one overarching similarity–they expect to profit from their investments. These investors carefully research the aspects they deem to be the best indicators of success and then back the firms they think are most likely to earn them a return on their money.
Newer or non-conventional funding sources
Small Business Administration microloans. The SBA microloan program earmarks funds for small businesses and certain non-profit firms, then makes them available to selected lenders. The local lenders handle the paperwork and administer the loans, which are capped at $50,000. The SBA sets eligibility requirements and limits how the funds may be used.
Crowdfunding. Crowdfunding allows companies to use social media and crowdfunding websites to attract public investors located virtually anywhere in the world. The benefits of crowdfunding include the ability to present your company’s story to hundreds or thousands of investors virtually overnight and the opportunity to attract investors who have only limited funds but want to back your venture. To minimize the risk to uninformed or unwise investors, the SEC regulates crowdfunding ventures in the U.S. One downside is that the crowdfunding sites keep a percentage of the funds raised.
Accelerator programs. Accelerator programs enroll startups in an intensive program of training and learning-by-doing in order to accelerate the lifecycle of the company. These programs utilize a core curriculum supplemented by guidance from mentors and focused interaction with other business owners. In addition, some accelerators incorporate rounds of fundraising–including Series A–into their programs.
❖ A Series A round of funding is more extensive and occurs after seed capital investments, primarily as a means to help promising startups grow. Consequently, a Series A is risky and often limited to a relatively small group of companies or individuals with deep pockets.
❖ Before your startup seeks Series A funding, you must understand the changes Series A funding will inevitably bring to your firm. These include a decrease in the amount of control you have in your firm and the necessity to plan and implement a strategy to effectively utilize the funds. You will also need a track record of success, documentation of all aspects of your business, a compelling narrative, and a persuasive pitch.
❖ Your primary network is an excellent place to start looking for Series A funds. You’ll also want to leverage your extended network, especially any contacts with whom you’ve established connections. Beyond that, you can choose from traditional options such as venture capitalists, private equity lenders, and angel investors or opt for newer alternatives such as SBA microloans, crowdfunding, and startup accelerator programs.
At Newchip we help entrepreneurs get funded. If you need further information about how to raise your Series A, feel free to apply here 🚀, one of our Venture Analysts will contact you soon.