You started with a great idea and turned it into a business. To get to this point, you’ve likely secured funding from friends and family and maybe even some early seed funding. However, you know that you need more capital in order to take your startup and grow it. You may need to hire new talent. Or work on product development or testing. Whatever the reason, you’re ready to begin the first official stage of venture capital fundraising, Series A.
What is Series A Funding?
Series A funding (aka series A round or series A financing) is one of the stages in the capital-raising process by a startup. Specifically, it is the second stage of startup funding but the first-stage of venture capital (VC) financing.
Series A funding is a type of equity-based financing. This means that the company secures the required capital from investors by selling the company’s shares. Often, the series A funding comes with anti-dilution provisions. Startups are known for issuing preferred shares, that do not come with voting rights.
What’s the Point of Series A Funding?
When a startup reaches the point that they are ready for series A, they have typically obtained a baseline level of success. Series A is used to ensure the continued growth of the company. The common goals include: product development milestones, hiring new employees, and other expensive, yet necessary, requirements for growth. When a company does well with this round of funding and uses the funds well, it goes a long way in attracting larger and more powerful investors in later rounds of funding.
Who are Series A Investors?
Venture capital firms play the largest role in funding. These are firms that specifically work with early-stage companies and startups. The general rule for VC’s: invest in companies that are already generating revenues but not yet at the profit stage. This is the series A funding sweet spot.
Angel investors and crowdfunding are becoming more common methods startups use to raise series A funding.
Series A Requirements for Startups
They typical series A round of funding is between $2 and $15 million. Therefore, once a startup has reached this point, having a great idea and lots of potential will no longer be enough. The founder must be able to prove to all investors that this is a great company and profitable idea and business structure. Therefore, not only is a solid business plan and accounting documentation required, but investors must be sure before they commit.
To assist in the process, a startup must have a valuation. The goals of valuation in series A fundraising include the identification and assessment of progress made by a company using its seed capital, as well as the efficiency of its management team. Additionally, the valuation process demonstrates how well a company and its management use the available resources to earn profits in the future. Only when the due diligence and valuation processes are completed will venture capitalists invest in a company.
For a Seed Round, both round size and valuation are fairly standardized. A $1M – $2.5M round is standard, with valuations typically falling in the $4M-$8M range.
Is the “Series A Crunch” Real?
Many startups will fall at this round of fundraising. The phenomenon is known as the “Series A Crunch” and it is true that even some very successful startups have struggled at this phase. Research points to less than 50% of startups will head to another round.
How to Avoid the Crunch
Preparation is the key to a successful series A round. All documents must be in order. The investor deck set. A solid and realistic valuation. A convincing pitch and KPI’s to back it up. Given the importance of the series A round, it is recommended that you consult with a seasoned fundraising attorney.
LawTrades knows Startups
We have the tools to set you up with a skilled startup attorney that truly understands all rounds of fundraising. This will give you the piece of mind to focus on your work and know that your fundraising is in the right hands. Series A and fundraising in general is difficult, let us help.