Do you have a great business idea? But need more funds to take further steps? Funds play an essential role in expanding a company and taking it toward success. This is where startup fundraising comes into the picture.
A startup company ideally begins with a seed funding round, the initial stage, i.e., the ideation stage. Then, based on the funding stage, the company may continue with Series A, B and C funding rounds.
This article discusses Series A funding and elaborates on the different aspects of fundraising.
What Is Series A Funding?
Case 1: Mr. A is the founder of XYZ Pvt. Ltd., a new venture related to software development. He has an excellent business model, product design and prior expertise as a software developer himself. However, he needs more cash to expand their operations. Since it is a startup, he is searching for financers to fund his company.
He has already crossed the initial stage of project kickoff and has a business model already figured out. The main objective is to provide resources for scaling the company and bringing sustainable profits. In addition, he has crossed the seed funding stage and is now looking for Series A funding from external investors who will invest in his business model.
Based on the above case, XYZ Pvt. Ltd. has a proven business model. The funding here is not required for building a product idea but for utilizing resources for further growth. Thus, he is eligible for Series A funding.
Series A funding is the second round of fundraising after the seed stage. While the seed stage works on providing funds to develop product ideas, understand the customer base and improvise on strategy, Series A funding uses the resources to scale the business.
Key Takeaways of Series A funds:
- Occurs after the seed stage
- Uses resources to expand the business model
- Investors or venture capital contribute approximately $2 to 10 million in exchange for equity
- Enables the first group of investors to use preferred shares and use the shares to generate revenue
How does Series A funding work?
Case 2: XYZ Pvt. Ltd has established an app model that allows users to manage their accounts with an excellent business model; however, it lacks sufficient revenue. He wants to raise $10 million. He has approached many venture capitalists and private equity for additional funding. Ultimately he finds two investors in the form of angel investors and venture capitalists. Both investors will now analyse the product’s strength, future valuation and how much return it will generate.
Key takeaway:
- Series A investors are attracted to locking money in the product or venture after the success of the seed stage.
- The startups secure capital from VC and PE by selling the company shares
- Startups will issue preferred shares to the investors against funds which may be in the form of convertible preferred shares
- The investors have the option to convert the preferred shares into common stock before the determined date of maturity
- The objective of Series A fundraising includes identifying and assessing the company’s progress in the future.
How does Series A fundraising work?
Series A fundraising works by enabling investors to analyse the startup’s valuation and identify and assess the progress. The valuation will help demonstrate how well the company will utilize the resources to generate profits.
Why do startups seek Series A funding?
For instance, XYZ Pvt. Ltd. has the potential to build a business from scratch to a successful level. However, he will require resources to perform several operations. These include product testing, development, recruiting staff, equipment, registration, marketing, and more.
A company with a full-proof idea that is well-tested and proven will require external funds to grow and sustain itself in the environment. Series A fundraising provides potential startups a chance to raise capital and grow their business with external funding from VCs and PE.
When is the best time to invest in Series A funding?
- The startup must have a good business model that details information related to the potential market and selling price of services or products.
- It is best to seek Series A funding if startups have a fast-growing user base and increasing revenue.
- If the startups have successfully crossed the seed funding stage.
If your company ticks one or all boxes, as mentioned above, the startup can invest in Series A funding.
Things to consider before raising Series A funding
Series A funding refers to investing in a private startup that has crossed the seed funding phase. It includes companies that have shown immense progress in planning a business model and the potential to generate revenue. Yet there are certain vital points to consider. These include:
- Are you Series A ready?
It is necessary to be familiar with the venture funds. These include assessing business models, revenue, systems to support efficient scaling, product ideas, customer acquisition strategies and much more. In addition, evaluating the company will help determine if you are ready for Series A funding.
- Setting a realistic timeframe
Begin the process within 7 to 8 months before raising a series. Understanding the required time frame will help alter the strategy to sustain the business.
- Use your network
Series A funding requires networking and building good investor relationships. Using extended networks like fundraisers will help in getting favorable outcomes.
- Plan fundraising momentum
Approach multiple fundraisers like venture capitalists, private equity and angel investors to get a better idea of the market dynamism.
- Prepare the deal terms
Preparing fundraising terms is important across all stages, including Series B and Series C. Thus, list the terms and conditions of funding appropriately.
- Engage a lawyer and get the paperwork done
Engage a lawyer to structure the venture capital funding. They will be well aware of the nuances, and deal terms and decide if they align with the investor’s needs. Additionally, complete all the paperwork in time by completing legal documentation and compliance. Make sure to add all records related to employees, corporate structure, client contracts, intellectual property, etc.
What Happens After Series A Funding?
Once you acquire series A funds, startups must prove their product is market fit. Then, venture capitalists and investors will monitor how the product progresses and want to see if it can scale further. Finally, the investors will further analyse if the business aligns with the metrics and decide if they want to opt for Series B and Series C fundraising.
The Bottom Line
Knowing whether you have crossed the initial stage of investment and if the firm is ready to take the plunge to Series A funding is essential. There are different rounds of financing, which differs yet operates similarly. What differs is the basic demand of investors from the startup.
Series A fundraising, like others, assists in developing ideas. It helps investors support potential businessmen to acquire funds for using resources in a profitable manner while investors in cashing out profitable returns. Pepcorns is a renowned finance-related firm assisting startups like Mr. A’s to find reliable investors and grow their companies. So choose wisely and increase your profits.
