Series A Funding

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21 Aug, 2024

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Series A Funding is a financing program for startups to raise money for their business after they have successfully crossed their seed stage. Its prime objective is to raise capital for the company's growth and to continue running the business. The series A funding amount is usually higher than that of the seed stage.

The Series A funding round is a part of venture capital financing. Here, venture capitalists and angel investors invest in these startups. Also, it serves as a vital stage after the seed funding. In addition, it helps startups to scale their business by hiring technology and staff. However, within 6-8 months of this funding, startups must generate profits from the business.

What Is Series A Funding?

Series A funding refers to the funding level that arises after the seed stage to provide additional capital to the startups. It occurs after the seed funding amount has been half burned.
Major investors like venture capitalists firms and some angel investors invest in these startups. Here, the funding amount ranges between $2 to $15 million.
There are various requirements for this funding. It includes proper pitch, accurate business valuation, paperwork, and documentation.
Once a deal closes, startups receive funding, and investors get preference shares and thereby acquire a 10-30% stake in the firm.

How Does Series A Funding Work?

Series A funding, in finance, is the initial stage after the seed stage, where startups raise capital for their business through venture capitalists and other investors. Here, the money raised is further used to upgrade their business. However, these investors will only invest if they find any strong potential in the business. Unless the venture holds a solid idea, Series A funding will not be easy. Some well-known venture capitalist firms include Benchmark, Intel Capital, Sequoia Capital, and Google Ventures.

The investors consider certain factors before proceeding with this funding. It includes previous sales, the risk involved, current CAGR (Compound Annual Growth Rate), market size, and market share. One investor leads and anchors the entire Series A funding round. If that investor is convinced of the essentials of business, they might invest in the startup. Likewise, other investors might be ready to follow the lead. However, there are different criteria necessary for startups to follow.

Here, the Series A funding amount raised by the startups ranges from $2 to $15 million. However, it might differ depending on the valuation of the startups. For example, a technology firm will have a different market valuation than other businesses. If the valuation is appropriate per the potential and cash flows, this round for Series A funding companies will turn positive. In contrast, a wrong or overhyped valuation can turn down investors. Therefore, valuation plays an important role for startups.

Typically, Series A funding companies pitch directly to the investors. And if they succeed, they get the required capital. As per the deal, the investors will demand preference shares in return. It means they purchase almost 10-30% of the company. However, passing this funding round takes a lot of work. Many startups fail in the "Series A Crunch" despite having survived in the seed stage.

Requirements

Let us look at the requirements of an average Series A funding for the startups:

#1 - Right Time To Ask

Any startup or business must consider whether they are ready to raise funds. Usually, seed funding is the first stage of acquiring funds. Series A funding becomes vital if the business burns cash and requires more. Therefore, they must prepare for the funding round 6-8 months before the decision.

#2 - Develop Good Networks With Investors

Once seed money exits the firm, raising more capital becomes vital to run the business efficiently. However, it is only possible if venture capitalists are ready to invest. Plus, a lead investor can automatically anchor the entire round. Therefore, establishing a good network among them is fruitful. Also, recommendations from friends and family help.

#3 - Excellent Pitch Plus Narrative

For any pitch to succeed, a proper narrative is essential. Therefore, startups looking to choose Series A funding must have a robust cause that can transform the existing norms. It will help in attracting the lead investor.

#4 - Business Valuation Model

Apart from a strong pitch, the appropriate market valuation of the company also matters. The venture capitalists will focus majorly on the company's sales, revenue, and profit margins. The deal might be effective if they find strong potential in the startup. Also, valuation models depict their investment's future cash flows and payback period.

#5 - Paperwork And Documentation

Once VCs have agreed to fund, legal compliances follow up. Thus, startups must check that all the company's legal documents are current. Otherwise, it might bring major issues during the paperwork. Usually, it takes around 6-8 months to finish the paperwork. Some include intellectual rights, patents, property papers, and other documents.

#6 - Closing Or Ending The Deal

Startups must close the deal in the quickest way possible. However, the team members must ensure that every due diligence and compliance is followed. Have proper communication with the investors and understand the deal terms to avoid any conflicts in the future.

Examples

Let us look at the examples of Series A funding to comprehend the concept better:

Example #1

Suppose Sun Claws is a startup that produces vegan-friendly pet food. It started in 2018 and raised $1 million through seed funding from a well-known venture capitalist. Likewise, the startup scaled to 15% of the market share in the past few years. However, due to extensive research, they burned almost half of its initial funding. As a result, they decided to go for Series A funding.

They prepared a pitch, demo meetings, and investor conferences for funding. Thus, they could raise an extra $15 million per the current valuation. However, this investment would have failed if Sun Claws had overhyped the sales figures.

Example #2

According to a Forbes article dated March 2023, a 3-D asset visualization firm "Hexa" has raised $20.5 million on an average Series A funding. In the seed round, they had raised $5.5 million, landing the total funding at $26.9 million. Likewise, in March 2023, another Biotech firm "Pili" raised $15.8 million for their new project of producing bio-based dyes.

Series A Funding vs Seed Funding

Although Series A and seed funding are important capital-raising requirements, they differ in certain key aspects. Let us take a look at the differences between them:

Basis Points	Series A Funding	Seed Funding
Meaning	It refers to the funding round that comes after the seed round.	Seed funding is the initial funding where startups raise money for the first time.
Objective	To raise capital to finance the business operations and new projects.	To support the initial research and operations of the startup.
Type of Investors	Venture Capitalist firms	This funding usually happens with angel investors, friends, and family.
Order of Funding	Seed Funding < Series A Funding < Series B Funding	Seed funding < Pre-Seed funding < Series funding.

Frequently Asked Questions (FAQs)

How long does Series A funding last?

The Series A funding, on average, lasts 6 to 24 months (2 years). However, it can vary depending on the burning of the startup. For example, a technology-extensive startup can burn more cash than other businesses.

Is Series A funding risky?

The risk associated with Series A funding is comparatively less than seed funding. Since startups have already developed their business, there is less chance of failure. However, circumstances might differ for all.

How many startups fail after Series A?

According to a report by SPD Load, almost 35% of the startups fail before moving ahead to Series B funding. For the rest, 65%, they raised approximately $5 million.

What is Series A funding vs Series B funding?

The only difference between Series A and Series B funding is that the startups go for the latter when the funding amount from the Series A round has already been used.