Series A funding generally comes after raising seed capital and is considered the startup company’s first significant round of venture capital financing. Both seed funding and Series A are similar in that financing is equity-based. The main difference between seed funding and Series A funding though is that it comes with anti-dilution provisions.
Anti-dilution provision is a clause that gives investors the right to maintain their percentage ownership of a company by purchasing a proportionate number of shares of any issue of the security.
The purpose of Series A funding is to ensure that the company sees continued growth and success. With the help of these funds, startup companies can do things such as reach new milestones in product development and attract new talent. Additionally, at this stage, companies want to attract new investors for any future financing needs.
Investors for Series A Funding
Venture capital firms are the primary investors for startup companies during Series A. These firms generally specialize in investments for companies that are in their early funding rounds. Venture capital investors look for startup companies who can prove they have a working product but need time and money to succeed.
More specifically, venture capital investors expect your company to go beyond having a great idea and team but demonstrate that you have a minimum viable product. This simply means that a company’s product has enough features to satisfy customers and provide feedback for future product development.
Investors will expect you to have a solid plan as well to develop your business model and expect the company to use the funds to increase their business revenue.
Choosing the Right Venture Capitalist
Choosing the right venture capitalist is critical for your growing startup. Think of your potential investor as a partnership, and you want that partnership with your future investor to go as smoothly as possible.
You don’t want to waste your time pitching to investors who aren’t a great fit for your company because you didn’t carefully select investors who align with your business.
For starters, it’s a good idea to scope out the investment scene. Pay attention to those investing and those who haven’t been as active recently. Once you’ve done that, you should begin searching for active investors who are investing in your particular industry.
Taking on this approach will help you find and connect with potential investors a lot quicker. Essentially, this means that you can cut out a lot of wasted time and get the funds you need as quickly as possible.
Who is a Good Fit for Series A Funding?
While seed funding and Series A is similar in a lot of ways, it is definitely more complex when it comes to securing funds.
To begin with, companies need to ensure that they have a valid business model that can be scaled and adapted according to the changing needs of the company. Along with this, your company should currently be generating revenue on a smaller scale than the funds you are currently requesting.
At this point, companies should also know where the product fits with the current market and should be generating customers. Even more, companies should have a good idea of where they need to take their business in order to reach a larger customer base.
Legal documentation is also essential before pursuing Series A funding. Companies should have all of their legal documentation and compliance forms organized and up-to-date before moving forward.
What are the Risks?
Acquiring funding from a venture capital investor is an important step in startup companies propelling their company to the next level. With that said, there are a few risks that companies should consider before moving forward.
One of the first things to consider is that you won’t be in control of your company in the way you might have intended. Once you form a partnership with the investor, you will release a significant amount of control over your company. Certain decisions such as hiring, marketing, production, and sometimes selling will be at the discretion of your venture capital investor.
Loss of control can be beneficial for some companies as the experience of the venture capitalist can guide your company in a better direction. However, this can be a disadvantage if the right decisions aren’t made.
Spending discipline is another thing to consider. When startup companies raise their seed funds, they are working with a relatively small amount of money as compared to what you will receive from a venture capitalist.
As you get into Series A funding, an injection of capital without discipline may cause you to make rash, and otherwise unnecessary, purchases for your company.
Getting Started with Series A Funding
The first thing to think about when pursuing Series A funding is ensuring that you have everything that a venture capital investor is looking for. This, of course, means you need to have validation of your business idea, have generated traction, a plan in place to generate new customers, a team, and a management system.
With a Series A round, venture capital investors are especially concerned with your company’s team. Although you should already have a team in place, your company needs to be prepared for expansion as you move forward.
Once this is in order, the next step is finding your lead investor. It’s important to note that this process should not be rushed. Instead, you should focus on an investor who not only has knowledge and valuable contacts but complements your business.
When it comes to finding a venture capital investor, the internet will be your best resource. There are plenty of venture capital firms floating around the internet and various sites dedicated to helping startup companies connect with investors. Be sure to narrow down your search by focusing on investors that align with your industry though.
Once you’ve found some investors of interest, it’s time to make the connection. This is an important step because venture capitalists favor trusted connections when making deals. This means you need to make a smart and attention-grabbing introduction. Along with this, it’s a good idea to try to make your introduction through a credible reference as the investor will be more willing to give your business some attention.
Not every startup company will have a credible reference on their side though, so what then? If you don’t have a reference, your best option is to do your homework on the firm to make the best introduction possible. Make it professional but keep it personal as well. Find any information on the firm you can that you think would be useful in your pitch. For instance, include any deals they made in the past that are relevant to your business.
What to Include in Your Pitch
At this point, you may be wondering what to include in your pitch. Your pitch shouldn’t be excessively long. It should actually be straight to the point but includes an explanation of the problem your startup solves, how it solves it, along with how big of a market there is for your solution. This is ultimately what matters to your potential investor and this is what will get their attention.
Moving into the Series A round for your startup can be exciting. This signals that your startup has done the leg work, has a viable product, gained traction, and is now ready for more capital to continue growth.
With that said, ensuring that your startup company is ready for Series A funding is highly important. Getting the attention of venture capital investors, while not impossible, can be more complex when compared to seed funding.
It’s important that companies are prepared to approach their new funding round understanding everything that is necessary to get started on the right foot. If you would like to know more about Series A funding or want to know whether your business is ready to dive into this funding phase, contact us to learn more.