Series A is an investment made by a venture capitalist in exchange for equity, usually after the company has demonstrated its ability to generate revenues. It is vital for any startup company’s success.
Series A investors are usually more experienced and have larger wallets than angel investors, which means they are able to provide the money necessary to fund aggressive growth strategies that allow startups to expand into new markets and achieve scale quickly. The idea behind this approach is that once the company achieves enough revenue, it will then become profitable enough for its operations to be self-sustaining without needing additional funds from outside sources. For as little as $50,000, a startup will receive enough funds to enable it to build a minimum viable product (MVP). The entire process from business idea to sale is usually completed in 12-18 months; however, successful startups can take less than 12 months.
Series A investors provide the money and the resources (help and advice) that allow companies like Airbnb and GoPro to grow into large enterprises. From day one, these companies were able to afford their awe-inspiring growth strategies because they were backed by knowledgeable investors. For this reason alone, Series A funding is imperative for sustainable growth. Series A funding also allows startups to develop and enhance their products and services. This is where product or service optimization comes into play, and where Series A funding helps to pave the way for a successful exit.
Simply put, Series A funding takes startups and turns them into viable companies. One of the main reasons so many businesses fail is because they run out of money before they can secure another source of investment. When this happens, companies must either discontinue operations or close their doors for good. With Series A funding, businesses have the resources they need to continue to grow and add significant value to their respective markets. SeriesA investments will provide the company with ‘growth capital’, which generally means infusions of capital for these 3 activities:
1) Product Development ( aka R&D)
2) Sales & Marketing
3) General Operation Expenses to run the business.
SeriesA are generally done in stages, where one to six months after the initial investment, the company will meet with their investor for a ‘SeriesA’ or ‘Round 2’ investment. The process is also known as a ‘convertible note’, meaning that if the company is not ready for a second round of funding, they can convert their note into equity at a future date.
What is a Convertible Note?
A note is a debt instrument where the company trades their own company’s stock for the note. If the company cannot raise enough money to fully convert their note back into equity, they will be forced to pay back the investors using future revenue. This is known as ‘backing out’ of the investment and demonstrates uncertainty for risk for potential investors.
Why do so many entrepreneurs go on SeriesA financing rounds?
Many entrepreneurs see these financing rounds as a way to get them out of “cash crunch mode” — where they are having trouble paying themselves, payroll, bills, etc…. The reality is that SeriesA financing rounds are not the best way to get out of cash crunch mode, but they are an excellent use of your time if you have a market opportunity, product/service that is underfunded, and are looking for growth capital.
What are the best areas for SeriesA financings?
Companies that have a very strong proven market opportunity, product/service that is underfunded, and a revenue model that is tested. This does not mean that everyone should go out and apply for a SeriesA, but if you’re considering it, then the following areas may be of value:
1) Startups with a good market opportunity. If you have a product/service with a large market need/demand you will likely be able to raise a Series A financing. I have worked with many companies that have been able to raise a Series A due to a proven market opportunity.
2) Startups with a good product/service and revenue model. There are a few ways to fund a product or service, the two primary methods being sales, marketing, and investor sales. Being able to raise a SeriesA from an investor will demonstrate strong sales activity and let you raise additional funding without diluting your equity position.
3) Social Enterprise Companies. Social Enterprise companies tend to be under-funded for several reasons: government policy, lack of public awareness/understanding, lack of user base/customer base to generate revenue..etc.. If you have a good social enterprise product/service, but are struggling with capital–perhaps because you are having difficulty generating revenue — then a SeriesA might be the answer.
What are some common Series A expenses?
1) Salaries & Related Expenses for Management
2) Sales & Marketing Expenses
3) Travel Expenses
4) Office Rentals & Related Expenses
5) General Overhead Expense (e.g. bills, payroll, etc.
Should Series A funding be handled by an Expert?
Like any type of funding, there are a few risks associated with Series A funding if not handled carefully. These risks include:
● Investors may lose interest in the company and stop investing. The advantage of this scenario is that it frees up time and resources for the startup and allows it to seek out other sources of fundings. This may even provide an opportunity for angel investors or even private investors to help you secure additional capital through debt financing.
● The company’s business model may be unviable or its promises unrealistic, which may lead investors to stop investing in it. This is an opportunity for the company to make adjustments to its business model and course of action.
● The company may suffer from negative publicity or legal disputes with investors. This could be the result of faulty reporting or misrepresentation; however, it is more than likely that it will come to light during the course of the Series A funding round.
● A startup may go out of business due to poor management, called “plummet” funding. This occurs when something triggers a negative spiral which causes cash flow problems that can’t be addressed through only debt financing. It is not common, but terrible things do happen.
● A startup may not achieve its stated revenue forecasts, which may lead investors to stop investing in it. However, when the company is successfully able to grow past its estimates, this can make subsequent funding rounds easier to secure.
Benefits of Engaging a Series A Expert
When done correctly with the right mindset and knowledge of how to secure capital, Series A funding can turn companies into highly valuable assets. It can provide startups with the opportunity for exponential growth without making them subject to the whims of outside investors. This is often referred to as “bootstrapping”; however, there are times when this process is not enough and it may seem like a good idea to go out and raise additional funds in order to work with more traditional investment sources .
Series A investors need to be knowledgeable and savvy when it comes to getting the most money for their money. They must be willing and able to provide substantial growth opportunities in order to secure funding, which is why it is important to do your research about the people investing in the company.