What Is Series A Funding?
As a startup founder, you may have raised capital for your business through a seed fund or startup founders fund, invested in by family members, friends, or angel investors.
This capital helps you with testing, team salaries, R&D, and proof-of-concept. After achieving your proof-of-concept and development milestones, it’s time to attract investors for the next round of financing.
Series A funding is the first round of business financing that’s funded by one or more investors. The chances of securing seed funding are 1:40, while the probability of securing series A funding is 1:400. If you think that's daunting, you’re absolutely correct.
However, it’s essential for your startup business to not just secure series A funding but also to secure this capital at the right time.
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Series A Funding Explained
Series A funding is just one stage in the capital-raising process that startup founders go through. Typically, series A financing is the first stage of venture capital financing and the second stage of startup funding.
Just like with seed financing, the series A round is equity-based. This means that a startup business secures the needed capital from investors by selling its shares to them.
Often, series A funding comes with anti-dilution provisions. Typically, startup founders issue preferred shares that don’t give their owners any voting rights.
But it’s also common for startup companies to issue convertible shares. These shares allow investors to convert their anti-dilution shares into common stock shares at a predetermined future date.
Apart from conventional methods of raising capital, such as through angel investors, you can also leverage equity crowdfunding to secure series A funding.
What’s The Goal Of Series A Funding?
Series A financing is typically used to facilitate the continued growth of a business. The key goals of series A funding include attracting new talent and reaching milestones in product sales and company growth.
During series A funding, the primary investors are venture capital corporations. Often, venture capital firms are companies that specialize in investing in businesses in their early stages of growth. Typically, Series A financing is given to businesses that are already generating revenue and sales but may not be making significant profits yet.
How Does The Series A Funding Round Work?
Unlike seed financing, series A funding follows a strictly formal approach. Venture capitalists, who will make up the majority of investors in this round of funding, will complete their own valuation process of the startup, along with any other research they require before making any investment decisions. Ideally, the startup will have already gone through this process internally and can provide potential investors with all the information they require.
Startup valuation is a crucial aspect of series A funding. Unlike startup founders in the seed stage, startup founders looking to secure series A capital need to provide more detailed information to potential investors, which they can use to make educated investment decisions.
Two key pieces of information investors want to take away from the startup valuation process for series A funding include the identification of progress made by a startup from the use of its initial seed funding and the efficiency of its management team.
It’s only when valuation processes and due diligence are completed that venture capital firms will decide whether to offer series A capital or to pass on the opportunity.
How Can You Secure Series A Capital?
After knowing how series A funding works, it’s clear that securing this financing isn’t a walk in the park. However, it’s not impossible. You must have a well developed strategy to make sure you’re fully prepared. Here are 3 tips that can help you secure series A capital to take your business to the next level.
Evaluation Parameters
As a startup founder, be aware of all the parameters venture capitalists use to assess a startup. Often, venture capitalists look for traction, validation of the idea, the customer acquisition process, who makes up the core team, the current management structure, and the product or service being offered. Besides these parameters, venture capitalists also consider the stage of your startup business, the market space you want to inhabit, and target equity.
Find A Competent Startup Investor And Mentor
Invest a significant amount of time in securing a lead investor who complements your startup. As your business grows, startup advice will be as valuable as capital. The lead investor you choose can also act as a key mentor for your growth, so they must have the knowledge you need, along with connections in your market space.
Consider Your Potential Team
Unlike when securing seed capital, investors are more concerned about the ability to scale when offering Series A capital. Even though you may already have a solid team in place, it’s important to have a well-detailed plan for hiring experienced workers and creating a quality team that you can show to potential investors.
Final Thoughts
Series A financing is the first round of series funding for a startup business. At this stage, venture capital firms will invest in a startup business that has an organized management team, proven business concept, and a solid game plan for profitability. So make sure you have all of these key aspects in place before you try to go for getting series A funding for your startup.