Series A Funding
Best practices for raising, engaging, and leveraging Series A Funding.
Series A Funding
It’s time for a company to get its first round of venture capital, and that means Series A funding. For many startups, the idea of Series A funding is intimidating — yet it can also be a make or break time for a business.
When a company is first founded, stock options are generally sold to the company’s founders, those close to them, and angel investors. After this, a preferred stock can be sold to investors in the form of a Series A. Series A allows investors to get in early with a business that they truly believe in. It’s a mutually beneficial relationship for both the company and the future stock holders.
Series A funding can be difficult because it also requires a Series A valuation. At the time of Series A funding, the company has to be valued and priced. Thought must go into previous investments, as prior investors will have also purchased the business at a specific valuation. If an angel investor purchased into the company at a valuation of $100,000 just months ago, then new investors may balk at purchasing at a $10,000,000 valuation today.
As of 2019, the average Series A funding amount is $13 million. The average Series A startup valuation in 2019 is $22 million. A Series A valuation calculator can be used to get close to the number that you should value your company at, though you will also need to thoroughly justify your valuation.
A company’s valuation will be impacted by a number of factors, including the company’s management, size, track record, risk, and potential for growth. Analysts can be called in for a professional valuation of the business. During a Series A funding round, a business usually will not yet have a proven track record, and may have a higher level of risk.
During a Series A round, investors will usually be able to purchase from 10% to 30% of the business. Series A investments are generally used to grow the business, often in preparation for entering into the market. The company itself will be able to decide how much it wants to sell during its Series A round, and may want to retain as much of the company control as possible.
Series A investments are fairly involved, and so they generally aren’t used to procure smaller investments. When smaller investments are needed, angel investors are usually looked for instead. A Series A round is usually highly publicized and open for investment, though naturally it’s the company’s discretion whether they want to take an investor on.
During a Series A round of investment, a company’s founders and major principles will generally speak with prospective investors in-depth, explaining the value of their company and what they would like to do with the investment capital. Series A investment rounds can vary depending on the industry that they’re in, but for the most part, they operate very similarly: the company announces that it is looking for Series A funding, values its company at that time, and then entertains offers from potential investors.
Once the funding round has been completed, the company will usually have working capital for six months to a year. From there, the company may either be able to move to market or may instead progress to another series of funding. Series A, B, and C funding rounds are all based on stages that the company goes through during its development.
There are multiple stages of startup funding: Seed, Series A, Series B, Series C, and so forth. Startups should be conscientious about the funding rounds that they will go through, which are generally based on the current maturity and development of the company. Here’s an overview of the major startup stages.
Seed funding is a startup’s earliest funding stage. Often, seed funding comes from angel investors, friends and family members, and the original company founders. An early stage startup may also look for funding through bank loans, but angel investments are usually preferred. Seed funding is used to start the company itself, and consequently it’s fairly high risk: the company has not yet proven itself within the market. There are many angel investors that specifically focus on seed funding opportunities, because it allows them to purchase a part of the company’s equity when the company is at its lowest valuation.
The next stage of the startup funding process is Series A funding. This is when the company (usually still pre-revenue) opens itself up to further investments. Series A funding is generally much more significant than the funding procured through angel investors, with funds of more than $10 million usually being procured. Series A funding is often acquired to help a startup launch. The business will publicize itself as being open to Series A investors and will need to provide an appropriate valuation.
After Series A funding comes Series B funding. Series B funding occurs after the company has already been developed through Series A funding but now needs to expand further. A company attempting to acquire Series B funding will have already proven itself at market. It will have a high amount of active users and user activity, but may need to still establish itself to truly begin growing revenue.
Finally, there’s Series C funding. Series C funding is for established businesses that are interested in scaling, such as businesses that want to expand into new markets. Series C funding is sought by companies that have already become successful, and are trying to expand that success. Series C funding may also be used by successful companies that are experiencing short-term challenges that need to be addressed.
Multiple rounds of Series A, Series B, and Series C funding may be procured. They are named A, B, and C because of the stage of development the company is in when procuring the funding, rather than because they are procured one after another. A startup can expect to go through all these stages of funding if it is successful, from initial seed funding to Series C funding. Most companies are going to be continuously gaining additional funding for the purposes of growth.
Each stage of the startup funding process operates very similarly, despite the different stages the business might be in. During the startup funding process, the company has to be able to establish its valuation, and will need to have clear plans for how it is planning to use the money it procures. Each round of funding will also, by necessity, dilute the company’s equity.
Series B Funding
Once a business has been launched and established, it may need to acquire Series B funding. A business will only acquire Series B funding after it has started its operations and proven its business model. Series B funding is generally less risky than Series A funding, and consequently there are usually more interested investors.
As with Series A funding, the company begins with a valuation. From there, it publicizes the fact that it’s looking for Series B funding. The company will be selling its equity at the valuation that is settled upon, and investors are free to make offers regarding this valuation. A startup that gets to Series B funding is already more successful than many startups, which will not go beyond their initial seed capital.
On average, Series B startups will usually get $7 to $10 million in Series B funding. The bulk of the heavy lifting will already have been done by seed capital and Series A funding. Series B funding will simply be used to grow the business further and improve upon it. Most Series B startups are going to be valued between $30 million to $60 million, because (again) they are proven companies.
Sometimes Series B funding will come from the same investors who initially offered Series A funding. Other times, Series B funding may come from additional investors, or from firms that specialize in investing. Either way, investors are usually going to be paying more for less equity than investors did in prior funding rounds, because the company’s valuation will have scaled. A Series B funding valuation will need to consider the company’s current performance and its future potential for growth.
Analysts can be used to price a company looking for Series B funding. However, it should also be noted that the company itself has more negotiating power as a Series B company, as it has proven itself to be successful.
Once Series B funding has been procured, the business will need to use this money to further stabilize, improve its operations, and grow. At this point, the startup should be in a good position. If the startup needs further money after it develops, to grow and expand, it may need to embark upon a Series C funding round.
But series C funding isn’t where the funding cycle ends. In addition to Series C funding, there are also late stage funding rounds that are often introduced to a company that is older and more mature.
Later Startup Funding Stages
After the business has grown substantially, it will enter into later startup funding stages. Series C, Series D, Series E funding, and beyond. Series C funding is meant for companies that have already proven themselves as a business model but need more capital for expansion.
Like Series B funding, Series C investors will often be entrepreneurs and individuals who have already invested in the company in the past. A startup may connect with their angel investors and Series A and Series B investors first when trying to procure Series C funding.
Since the business is already established and just needs its funds to grow or expand, it is less likely to be a risk. At this point, the startup is no longer really a “startup,” but rather an established business with a proven business model, which needs to either expand its product offerings, expand into new markets, or expand its marketing output.
But there are more startup funding rounds even beyond Series C.
The late stage funding rounds explained:
A Series D funding round may occur if the company was not able to raise enough money through its Series C. This often has implications for the business. Series D funding occurs when the business was not able to meet its targets with its Series C, and consequently it can mean that the business is now at a lower valuation. Being priced at a lower valuation is usually very negative for a business.
If Series D funding is necessary, due to challenges that the company is facing, then it may be the only way for the startup to survive. However, it generally devalues the company, and may shake future investor faith.
Series E funding may be necessary if Series D funding isn’t able to meet the company’s needs for capital. This is, again, a very bad sign, and very few companies are going to survive to Series E funding. Series E funding will only occur if the business still hasn’t been able to make up its own capital but the business is still struggling to remain active and private.
Finally, very few companies are going to make it to Series F funding or Series G funding, but it is possible. Some notable financial services have found themselves getting Series F or Series G funding, because capital is so inherent to the ways that they do business. Every round of funding represents new opportunity for the business, but also presents the possibility of diluting the company’s equity and valuation.