Creating a startup company takes imagination, a great idea, and resources like venture capital financing. If you aspire to create a unicorn startup, funding is a crucial variable. That’s why you’re probably wondering “What is Series A funding?”
Without it, it will be tough for startup founders to make progress. Once you raise initial funds from angel investors and your network, Series A funding will probably be your first goal.
1) What is Series A funding?
To answer this question, let’s zoom out for a moment to answer a different question: what are the stages of investing (or rounds of investing)? Investing stages vary by firm and startup. However, the following funding rounds are typical.
- Pre seed funding. Typically, this funding round is small. The initial resources to start the company often comes directly from the company founders and their friends and family. Usually, there is no exchange of equity, and the dollar amount of pre seed funding is small.
- Seed funding. Seed funding is the first “official” funding round with amounts ranging between $200,000 to $2 million. Investors usually expect to receive an interest in the startup business, such as an equity share.
- Series A funding. By the time a startup seeks Series A funding, it is operational, has a product, and some customers. Investors like Greylock and Benchmark Capital expect a business to have a business model that will generate profits. It is no longer enough merely to have a good business idea. According to Investopedia, the average Series A funding amount is $15.6 million as of 2020.
There are other funding rounds available from venture capital firms (e.g., Series B, Series C, and so forth) but, we’re going to limit our focus to Series A funding in this post.
2) How do I prepare for Series A Funding?
There are several ways to prepare for Series A funding.
Before you talk to potential investors, start by setting reasonable expectations for how much funding you are likely to raise (i.e., $3 million to $15 million is probably achievable; $50 million or $100 million is unlikely). Next, understand that raising Series A funding is fundamentally a sales transaction. An investor is buying an interest in your company through debt or equity, and the startup receives cash. Investors have many different investment opportunities, so the startup needs to make a compelling pitch.
To prepare for Series A venture capital funding, be prepared to answer common questions, including significant performance indicator numbers:
- What is the cost of customer acquisition?
A startup that can profitably acquire customers over and over again is more likely to succeed. Therefore, it is worth taking some time to crunch the numbers on your CAC (i.e., cost of customer acquisition).
- What is your annual recurring revenue (ARR)?
Some revenue question is practically guaranteed to happen. Some investors will still consider a “pre revenue” startup in a Series A. The odds of success are higher if you can point to a compelling annual recurring revenue chart.
- How will you use the funds?
Remember, an investor invests in a startup to achieve a positive return. The odds of success are higher if the startup has a clear plan to use Series A funding to grow the business. A vague answer like “developing the product” is not compelling. Instead, you might talk about building specific features like a Salesforce integration or investing in B2B lead generation program.
- Who are the previous investors in the company?
An experienced investor will usually ask about prior investments in the company. For example, have prior investors taken a seat on the board of directors? Also, investors might want to see a cap table (i.e., capitalization table) that sets out the specific shareholders and their shares’ value.
- What is your total addressable market (i.e., TAM)?
Building a unicorn startup is easier when you have a large, fast-growing market. For example, the electric vehicle industry is growing. The AI software industry is also growing quickly. Get your market research numbers in order before you ask for Series A funding. If the potential market is too small, private equity firms and other investors may not see an attractive exit strategy such as a public offering.
- Did you customize the startup pitch for this investor?
Before walking into a room with an investor, do your homework on them. There are free resources like Crunchbase that make it easy. For example, you can see that Index Ventures has recently invested in Cutover, Rohlik, and Dream Games in 2021. If you were going to see Series A funding from Index Ventures, it would be wise to speak to companies who have recently received investment so that you can anticipate investor-specific questions.
3) How long should Series A funding last?
Running out of money is one of many nightmares that haunt startups and venture capital investors. The answer will depend on company growth plans, marketing channels, and product plans. For example, a hardware startup may consume funding more quickly due to the cost associated with creating prototypes.
As a rule of thumb, look at a few factors before you go back to venture capital companies for more funding
- Expenses Trends: a key performance indicator to track monthly
Also known as burn rate, the amount of money a company spends each month influences how long Series A funding will last. If revenue is low and does not cover expenses, Series A funding will run out more quickly.
- Annual Revenue Estimate (or Run Rate).
In the early stages of a company, you may not have multiple years of revenue data. Instead, the company may only have three months of sales revenue. In that case, you might annualize the three months of revenue on an annual basis. If there are significant outliers in the data (e.g., like a customer who bought 1000 licenses vs. an average of 100 seats others buy), consider excluding them from the calculation or using a weighted average.
- Sales Cycle: a key performance indicator to watch
The length of time it takes a startup business to close a new business is a significant factor. If you are executing B2B marketing strategies to obtain enterprise clients, the sales cycle might be measured in months. In contrast, an ad-supported mobile game company may able to generate revenue more quickly.
Note that marketing fit (also known as product-market fit) influences your sales cycle. When the product is unknown and hasn’t established market share, sales will take longer.
- Product Development.
If the product is far from complete or operational, the lion’s share of Series A funding may go into research and development. Aim to develop a product roadmap so that you can launch a basic version and start gaining customers before funding runs out.
4) How much do you get for Series A funding?
Millions of dollars! That’s the short answer.
Let’s answer this question with new 2021 data sourced directly from Crunchbase.
- BlocPower raised a Series A of $8 million on February 22, 2021. BlocPower is an energy technology startup based in New York.
- Zeni raised a Series A of $11.5 million on March 9, 2021. Zeni is an AI finance startup serving small businesses.
- Pipe raised a Series A of $50 million on March 9, 2021. Pipe is a finance platform to transform recurring revenue streams into upfront capital.
- Sorare raised a Series A of $40 million on February 25, 2021. Sorare is a fantasy football company based in France.
- Symbo raised a Series A of $9.4 million on March 4, 2021. Symbo is an insurance tech startup company based in Singapore.
As of March 11, 2021, Crunchbase has data on 270 Series A funding transactions in the past 30 days.
Remember that startup investment amounts – including Series A – tend to ebb and flow throughout the economic cycle. Fundraising during or immediately after a market crash is likely to be complicated.
5) What do Series A investors look for?
It depends on the investor. That said, there are a few general patterns to keep in mind.
- Prior Investment. In many cases, a startup will already have seed funding or pre seed funding before taking on a Series A.
- Prior Relationships. From attending dozens of TechTO events, the importance of relationships in funding has come up repeatedly. If an investor first met you years ago, long before you started fundraising, that is a good sign. It is possible to go in cold and win, but that is playing business on hard mode.
- Working Product. Investors are unlikely to be impressed by a vague PowerPoint presentation about the size of the target market. Instead, aim to build a basic working product that customers can use.
- Revenue. Yes, revenue matters! Without revenue and customers, investors will struggle to understand a company’s market value.
How To Get All The Funding And Customers You Want
You’re probably curious about Series A funding because you’re running a growing startup. To get a free review of your marketing plan, contact me today. In 20 minutes, we’ll develop at least three marketing ideas you can use to grow your traffic and customers.