For those of you who are European… We are not talking about a premium football league in Italy, although it tends to be just as exciting. Series A funding can elevate your startup to the next level and give you stomach ulcers at the same time.
Influx of capital, business concept validation, and strategic guideline on the one hand. High pressure and dilution of ownership on the other. Beneficial as it is, Series A comes with trade-offs, too.
Is it suitable for your startup and is this the right moment to apply for funding? Let’s find out.
What is Series A?
A Series A investment round is an important milestone in a startup funding journey. It represents capital from investors, especially venture capital, that stimulates startup growth and scalability. The aim of the Series A is to fund company expansion, scaling, new product development and additional hiring.
The investment size is usually higher than in the seed round. In the US, it usually varies from $2 to $20 million and depends on many factors, like market size and potential, industry, etc. Venture capital analysts also take into consideration the founders’ expertise and their plans for generating revenue.
In return for the investment, VC expects equity in the company. The percentage they get depends on the valuation of the company at this stage, investment size, risk, and obviously your negotiation skills.
The desired outcome of Series A funding is proven potential for market penetration and predictable revenue generation.
Seed vs. Series A
Seed is the first official money a startup raises from external investors such as business angels, accelerators, incubators, and venture capital specialized in seed level. Thanks to this investment, founders can develop the product, conduct market research, purchase inventory and equipment, or build the initial team.
Due to startups' limited traction and unproven business models, investors take on a greater risk. However, seed investment allows future investors to see that the idea has paid off and offers the potential for further growth.
At the seed stage, the company has already proven its viability. Founders and investors refer to it as product-market fit. This means that consumers or customers want to purchase the product you have been building.
Series A is the next round in your startup's lifecycle. It is time to focus on accelerating growth and scaling the concept.
Series A vs. Series B
These are both rounds of financing for startups but come in at different stages of company development. At Series A, a startup has demonstrated revenue, achieved convincing growth and further verified its business model, and may now look for new markets or businesses.
Series B funding is the next stage of funding performed by venture capital and private equity investors. A startup raises Series B funds when it has reached a certain point in its development and operations.
The investment size for Series B is usually twice the amount of a Series A and can vary from several million to tens of millions of dollars. The funds may help to expand the team, invest in infrastructure, upgrade technology, scale the product or service, and intensify marketing activities and client or customer acquisition.
Since the risk factor is still high, investors may take half of the ownership of the company.
How to determine the right time to raise Series A
Sign #1: You have strong month-on-month (MoM) traction
Traction is a measurement that indicates where your startup currently is. In the investment world, traction is defined as the progress or momentum of a startup. It confirms that the business is getting the necessary attention and has the potential to become successful.
What is good traction? There is no simple answer to this question, and “good” is subjective. There are different types of industries and investors, just as there are numerous ways to measure growth. A wide range of indicators can be used to demonstrate traction to the investor:
- sales,
- revenue,
- number of customers,
- number of products,
- customer engagement,
- endorsement,
- team expansion.
If your startup traction is above 20% – congratulations, but do not worry if your MoM numbers are still small. Just be honest with investors and yourself.
Sign #2: You have a network of investors who are actively interested in your startup
Only a tiny percentage of startups will enjoy the privilege of being funded. The team, the traction, the potential – all of them mean nothing if nobody sees your pitch deck.
To increase the chances of this happening, you need to develop your investor networking skills, as interpersonal connections might have larger impact on your path to Series A acquisition than the business idea itself.
Start with your existing contacts, make full use of social media, present yourself even to those who are seemingly from another category or out of reach. Do not feel intimidated. Remember that experienced partners never turn down new contacts because they might want your interest in the future, when your startup becomes successful.
Venture capital may sound like an abstract term, but venture capitalists are human beings with human instincts. If they know other VCs are interested in your idea, they might want to get a share in it first.
Sign #3: You have an annual recurring revenue (ARR) of $1-5 million or otherwise significant growth
By the time you raise a Series A round, your startup should have developed a scalable business model. Generating a significant ARR is crucial evidence that customers are willing to pay for your product or service.
As Series A companies are still considered early-stage startups, $1-5 million annual recurring revenue may be the range to aim for.
Sign #4: You have achieved product-market fit
Simply put, product-market fit occurs when you have built a product that is fit for the market and that people or companies actually want to buy. You can proudly say you have achieved it when you have identified a target market need and addressed it properly.
For Series A investors, product-market fit is equivalent to reduced risk, increased market and scalability potential, higher customer retention, better acquisition of later-stage investors and the prospect of better exit options in the future.
Product-market fit does not have a fixed timeline, and it can take several months or even a few years to achieve.
Sign #5: You have a clearly defined growth strategy
Growth strategy is crucial to ensuring the long-term success of your business. Once you have come up with the right one, you will be able to get Series A investment, hire the best people and achieve every startup’s goal: growth.
There are four common types of growth strategies:
- Market penetration is based on increasing sales and market share by attracting more customers and encouraging existing customers to buy the product more often. Market penetration is a growth strategy that does not imply a significant change in the product.
- Product development strategy focuses on creating new or improved products to drive growth and gain a competitive advantage. This strategy is focused on innovation that meets customers’ rapidly evolving needs.
- Market expansion means that startups can scale the business by addressing new geographical markets, customer segments or distribution channels with the existing offer.
- Diversification is offering new products that are unrelated to your current ones. It may sound awkward in relation to an immature company such as a startup, but paradoxically it can secure the company against market failure.
Sign #6: You can prove there’s room to scale within your chosen market
Scalability is the holy grail of investors at any round of funding, not only Series A. Actually, every successful startup requires this component. Scalability is your capacity to grow and adapt to evolving market needs and conditions without being blocked by the increase in costs and resources. Simply put, it is a company’s readiness to manage growth while maintaining profit margins.
A scalable business provides sustainable growth, high return on investment (ROI), reduced risk (including for future investors) and a competitive advantage.
Sign #7: You have a strong defensibility strategy
Let’s face facts. If your idea is good enough (and we believe it is), it will be copied and will have to challenge the competitors in one way or another. Since dropping your prices may not be the best strategy, you have to come up with other competitive advantage scenarios that will let you secure the margin and market share.
Being aware that your business is not bullet-proof is one of the most important steps to achieving a Series A round and investors favor forward thinkers who anticipate the risks and ensure their businesses are defensible.
How can you maintain defensibility in your startup? First of all, focus on customer experience. Your target audience’s satisfaction plays the most significant role in maintaining a competitive edge.
Make sure you get a head start on your rivals and move faster to the next stages. Put together a team with the right attitude. Innovate. Scale. Protect intellectual property. Build network effects and a strong brand that customers can connect with emotionally and psychologically.
Last but not least, use data: acquire, store and analyze it in every possible way to secure the defensibility of your startup.
How should you prepare for a Series A round?
Step 1: Set a timeline
This is important for both you and your future investors. Since the whole process can take up to several months, it is essential to start early. A clear timeline includes preparation, reaching out to VCs, and closing the deal.
A well-prepared timeline for a Series A round is essential for successful fundraising. In addition to communicating professionalism, it creates accountability, instills confidence in the investors and ensures that both startups and VCs are in sync throughout the entire process.
Step 2: Prepare your financials
You will not take a single step toward Series A without them. You may attract investors with your idea or charisma, but you cannot go farther without numbers that sell.
Income and cashflow statements, and balance sheets prove the current health of your company and its potential to grow. They will play a significant role in startup valuation and due diligence. Thanks to financial documents, investors have a chance to look at your historical performance and project future profit.
But your past results are just the beginning. Most of all, investors want future financial projections with insights into the startup's expected growth. They need to be able to evaluate the potential return on investment, risk, resource allocation and strategic planning, etc. Estimations should be as realistic and as data-supported as possible so as not to undermine investor confidence.
Step 3: Create a target investor list
Make a list of potential investors based on your industry, geography, stage of development and amount of funding. Focus on the investors who have experience in your sector, but do not discount those from neighboring industries. Investigate their history and reputation.
Put emphasis on finding those who share your vision for the startup's future, as you may stay together for a long time.
Step 4: Build an advisory board
An advisory board can bring experience and expertise in your industry, finance, law, marketing, and more. It offers valuable guidance and reputation enhancement to your startup. The board’s external perspective may be useful in establishing long-term goals and providing fresh ideas as well as innovative solutions for your challenges.
A board member's network is often extensive, and you might want to use their contacts for your startup’s sake.
Step 5: Define realistic startup valuation goals
How much is your startup worth? Ask yourself this question before investors do. In the Series A round, startup valuation is treated seriously. In the standard earnings method, you multiply your three-year average earnings. In SaaS, ranges can go from x8 to as much as x12.
Human capital and market value is the second most popular method. In the scorecard method, factors such as the product, team, traction and market are given a score which together determine startup value.
There are several methods for performing valuation. Try different approaches and find the one that helps you get a clear idea of how much money you want to raise and what percentage of your company you are willing to give up in exchange.
Step 6: Develop a compelling story
VCs realize that even the most innovative idea can fail without a skilled, determined, and passionate founder or leader. That is why they invest in individuals as much as they do in startups.
Create a gripping narrative that appeals to the investors on a personal level. Do not just sell the potential for growth. Make investors excited about your project; make them want to use your product and be a part of your startup adventure.
Step 7: Prepare your pitch deck
You might have read a million guidelines on how to prepare a perfect pitch deck. Value proposition, business model, market opportunity, competitive advantage and growth strategy – they are all important.
Here's Front's Series A pitch deck that helped them raise $10 million.
But remember that investors are people and people love stories. Think of your pitch deck as a movie trailer which should thrill, present the problem and inspire hope for a solution.
Good luck and should you need help with product development – RST is here to help
Series A round means serious plans, funds, and expectations. Investors want to be sure their money will stimulate the growth of an exceptional idea with great potential. With the right people, the chances of them choosing your startup increase.
We believe in your staff, but if you need more people in your corner, expand your team with RST's professional software engineers, architects, DevOps, designers and testers. With our staff augmentation service, you can scale up your team and fill talent gaps in short- or long-term.
We will gladly assist you in your product development and, consequently, in Series A investor acquisition. Just get in touch with us.
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