This article will discuss the nuances behind securing Series A funding to take your now significantly battle-tested product or service and scale it into a late-stage startup.
We'll cover what Series A financing is, how to determine when and how much to raise and how long it should last, what material you will need to raise it, and how to prepare for the process.
What is Series A financing?
Series A financing refers to an investment in a private startup company after it raises a seed and pre-seed round. You've iterated a lot on your product/service and business model if you're raising a Series A. The result should be product-market-fit and a demonstrated potential to penetrate the rest of the market and generate predictable revenue.
After negotiating with investors, you'll receive checks or have funds wired into your company bank account in exchange for preferred equity.
Raising this money will allow you to step your foot on the pedal toward reaching exponential levels of growth. You'll have plenty of cash to expand your operations through hiring, purchasing inventory and equipment, and pursuing long-term growth goals.
Generally, series A funds are used for:
- Creating internal cultural and management processes with the help of your board so as to prepare your startup for hypergrowth.
- Expanding your sales & marketing teams to find different repeatable growth playbooks.
- Iterating on your product by hiring more talented engineers to build new features that different segments of your market might request.
When to Raise Series A?
It’s best to start raising Series A capital 6-8 months before you've finished deploying the funds from your Seed round. This timing should give you and your team enough time to pitch to your existing investors and new investors that your startups' traction and trajectory are worthy of a series A level round.
An important caveat is that the due diligence process venture capital firms run at this round is more sophisticated and will naturally last longer. So don't be surprised if it takes 4-6 weeks of back and forth conversations with a single investor to get a term sheet.
When you raise a series A round, it should not be a surprise to your existing or potential target investors. To minimize the length of the due diligence process, you want to have as many of these preliminary relationship-building discussions as early as possible.
As a founder, it's your responsibility to consistently communicate with your investors in the form of monthly updates and to form relationships with new investors before you need to raise. You want them to be well versed in the fundamentals of your business and your traction.
Under no circumstance should you wait until you have less than four months of runway to start having conversations with investors. It's better to be safe than sorry; after deploying your seed capital, you should now have many employees whose families rely on you for their livelihood.
How is Series A Different From Seed Funding?
The first difference between a Series A and Seed funding is that series A comes after a seed round. The significant differences arise from the levels of traction on both product and customer acquisition.
After a Seed round, there should be no doubt that you've built a product or service that people not only want but are willing to pay for. Investors and startup founders refer to this as product-market-fit. If you have product-market-fit and raise more money at a higher valuation than your seed round, it's a Series A.
Series A startups raise anywhere from $2-$20M with lots of variations in valuation. They usually have established proof of product-market-fit by delivering revenue at a consistent growing cadence and have validated various customer acquisition channels.
You may also want to read our Seed Funding guide.
How is Series A Different From Series B?
From a distance, anything from Series A onwards might look the same, but there are differences between Series A and Series B. Some ways in which Series A and B are different include the funding amount and dilution given, how far along a startup is in the product and market penetration wise, and milestones to be achieved with funds.
The funding amount for Series B is usually twice the amount of a Series A. Still, since there is less investor risk that the startup will fail, investors take about half the amount of ownership in Series B than their Series A counterparts.
If a startup is a mobile food delivery service, Seed is used to build the original service and find customer traction in one city. Series A is to build a regional presence in multiple cities and make minor improvements to the service. Series B is to create a national presence and build the internal processes needed to go international.
How Does Series A Funding Work?
The business law mechanisms of Series A funding for startups and investors are complicated. Still, they are less complex than those in the earlier stages because there are fewer options contract-wise (our seed-stage article dives deeper into the nuances of the different financing types and contacts).
Since the checks investors write for series A are significant, SAFEs don't offer investors the resolution around issues of economics and control they're looking for. Convertible debt term sheets are also insufficient, so most Series A rounds are priced equity financings. In equity financing, investors buy equity (preferred stocks) in your company in exchange for their investment.
After you've gone through pitching investors (more on this later) and the due diligence process with new or old investors, you'll receive a formal letter, called term sheet, expressing their interest in investing and their terms. Covering all the possible terms in a term sheet is out of scope for this general guide, but all critical terms boil down to economics or control.
Economics refers to the dollar return that investors seek to get in a liquidity event of your startup, usually either a sale of the company, a wind-down, or an initial public offering (IPO). Economics terms in a term sheet are those that have a direct impact on your investors' return.
The essential economic term is valuation. The valuation is important because it dictates how much of your company you are selling and, consequently, the price your potential investor will pay for their piece of your company in the form of preferred stock. For example, a $10M investment at a $40M post-money valuation would equal you giving away 25% equity.
Another important economic term intrinsically tied to valuation is employee option pools. As a founder, it's in your best interest that the company has sufficient equity (or stock options) reserved to compensate and motivate your workforce.
But a more significant option pool is not always the better. Although such a pool will make it easier for you to give good option packages to your new hires, the pool's size directly impacts the valuation of your startup. A large employee option pool will lower your pre-money valuation and is a common valuation trap used by investors.
Suppose a startup receives a $5M investment at $20M pre-money. Assume it has an existing option pool representing 10% of the outstanding stock. The investor pushes that they want to see an increase towards a 20% option pool. For this case, the additional 10% will come out of the pre-money valuation, resulting in an effective pre-money valuation of $18M, diluting you and any previous employees you've hired. The typical Series A startup's optional pool ranges from 10% to 20%, with later stages startups having smaller option pools (1-10%).
Control refers to the mechanisms that allow your Series A investors to exercise control over your startup, affirmatively or by vetting certain decisions. The two control terms most relevant to Series A rounds are board of directors and protective provisions.
Board of Directors
The board of directors is the most powerful component of your company's management structure and usually has the power to fire the CEO. Your board has to approve many action items that your startup will take, option plans, budgets and significant expenditures, mergers, IPOs, new offices, future financings like your Series B or venture debt, and hiring decisions of your C-level executives.
Directors do so by formally voting on points whenever different points of contention arise. For example, you and your co-founder are confident that it’s time to sell your company to a larger company, but other members on your board disagree and call a formal vote on the contended topic. Usually, each director's vote has equal weight. However, it's not unheard of for certain high-growth in-demand startups like Google or Facebook to have more weight for the founders' votes (a supermajority).
Electing directors to your board is an essential and delicate point. Your board will be your strategic planning department, judge, jury, and executioner all at once. Some investors are awful board members, even if they're spectacular investors and good people.
Potential directors fall into three categories: founders/CEO, venture capitalists, or independent board members. For Series A, you usually see a three-person board of directors consisting of a founder/CEO, a partner at the venture capital firm that leads your round, and an independent board member (former or current CEOs who can act as mentors to the executive team). This is a balanced board. You can also add other board observers like your other co-founders or operational specialist from other investors in your round to help with strategy.
If you are interested in learning more about how boards of directors operate and how to make them a flywheel for your startup, we highly recommend you to read Startup Boards by Brad Feld.
Protective provisions are vetoing rights that your investors have over your startup's actions. They exist so that investors, usually VCs, can protect their investment, especially if it materially impacts the economics of their position in your startup.
Investors used to highly negotiate these provisions, but these have lately become more standardized in the US. These are ten of these standard provisions you'll likely encounter when going through a Series A process:
- Change the terms of common or preferred stock owned by the VCs.
- Authorize the creation of more stock without board approval.
- Buy back any common stock or pay a dividend to yourself or other shareholders.
- Sell your company without board + VC's approval.
- License away your company's intellectual property, effectively selling the company without the board + VC's consent.
- Change the certificate of incorporation or bylaws of your startup.
- Change the size of your board of directors.
- Borrow money without the board + VC's approval.
- Declare bankruptcy (sunsetting) without the VC's approval.
- Perform an initial equity public offering (IPO) or similar financing to public market investors.
Note that protective provisions don't eliminate the ability for you to do these things entirely but simply require the investors' consent. As long as the action is not perceived as bad for your startup from the VC's point of view, the permission for you to do those things can still be granted.
If you are negotiating a deal and investors are digging their heels on a provision that doesn't impact the economics or control, they are often blowing smoke rather than arguing substantive issues.
How Much Series A Money Should You Raise?
How much money to raise depends entirely on your startup's needs, industry focus, and the funding market. However, Series A's general rule of thumb is to raise enough money to fund/meet your revenue growth milestones to raise a Series B. It would be best to collaboratively discuss these growth milestones with your Series A investors to guarantee a future Series B check.
For specific industries like deep-tech or biotech, it's entirely possible that you still won’t have revenue or product-market-fit at a Series B stage. However, for a traditional enterprise or consumer SaaS startup, a growth rate in revenue in the range of 3x year-over-year (10% month-over-month) to 5x year-over-year (16% month-over-month) will be enough to guarantee Series B funding.
It’s a great idea to internally discuss what levers to pull to get that growth with the rest of the management team. In Series A, you'll usually have between 11-50 employees, so it's up to the management team to calculate where deploying the funds will lead to the best return on investment. As general advice, investing in building or iterating on products that people want and making it easier for people to discover your products are usually good things to invest in.
To give you more color, at Failory, we studied 6,098 Series A rounds and discovered that the average amount raised in a Series A round by US startups is $22,649,065, while $20,581,131 for startups in the rest of the world.
Largest Series A Funding
At the time of writing, the award for the largest Series A funding round goes to Didi Freight, the China-based mobility startup that provides a ride-hailing-like service for customers to ship tons of freight through trucks. Didi raised a mind-blowing $1.5B series A round in Feb 2021, from a syndicate of investors.
Realistically, very few startups are building in spaces where your business model involves providing $100,000 freight trucks as a service. So don't expect to raise amounts anywhere near that for your Series A round, especially if you're building a software business that doesn't have high cash-flow barriers to entry.
How to Get Series A Funding?
To get Series A funding, pitch venture capitalists your vision and traction until they have enough conviction to write you a check.
The first step to start fundraising your Series A is by talking to your Seed investors, as you'll need their approval to fundraise. If a VC firm invested in your Seed round, they'll likely invest in your Series A. This is because VC firms have ownership targets for their investments as a form of portfolio construction strategy.
They like to double down on the winners they've picked, and if you've found product-market-fit and have the correct growth numbers, it'd go against their goals not to invest in you again. This is also why it's a strong negative signal to other potential Series A investors if your seed investors don't participate in your Series A.
Once you get the green light from your existing investors, it's time to prepare for the Series A process. It's similar to the previous seed fundraising dance, except VC firms' time to check and due diligence process are significantly longer. Expect to schedule lots of investor meetings to build deep relationships ahead of your fundraising and go over your materials in these meetings to get feedback.
Let’s dive deeper into how to prepare for a Series A fundraising, the investment materials you need, the process, and the closing of the round.
Unless you're experiencing explosive growth that maybe two handfuls worth of startups experience in a decade, preparing for a Series A requires significant effort.
A strong fundraising preparation for Series A is held up by three pillars: deep relationships, storytelling, and data.
You form deep relationships with potential investors by meeting with them frequently both before you start fundraising and when you begin the process. Before you've scheduled these meetings, you should figure out which investors would be dynamite for your startup, as these are the ones you should target.
Start by curating a list of investors who lead Series A's in your space that you might want to have join you on your journey. Some investors who could be good fits include:
- Investors you've talked to in the past or know personally.
- Investors who have thought deeply about your space and have published those thoughts online.
- Investors who actively invest in your vertical (but haven’t invested in any direct competitors).
Get warm introductions to investors on this list from founders who have worked with those investors in the past or from others who know them personally. It is all about pitching storytelling through your investment materials and bringing data to back up what you're saying.
Once you've caught a lead investor, they'll sometimes introduce you to other investors who might be a good fit.
Investment materials are the medium of storytelling by which you communicate to your potential investors that you’re a fit for them. It's important to remember that as a founder, you're usually immersed in the weeds of day-to-day operations and might be a little rusty in pitching the high-level overview of your startup to investors. As you build these materials and pitch to investors, you'll better understand what components of your startup are transparent and which ones might need some polish.
Two crucial investment materials are pitch decks and data rooms.
Pitch decks are presentations that communicate your company's story clearly and credibly visually. You should be familiar with pitch decks from your Seed & pre-seed fundraising rounds.
You should build a teaser pitch deck, which is a shorter version of your full-pitch deck which you send via email, whose goal is to spark enough interest to get you a meeting. The full pitch deck is used to pitch during the initial meeting and other follow-up meetings with investors.
Pitch decks have many components that can be mixed and matched to create your storytelling narrative. Below are some insights that investors want to be included in your Series A deck:
- Your company, logo, and tagline.
- Your vision - How is the world different if you achieve your objectives?
- The problem - What are you solving for the customer or user?
- The customer - Who are your customers or users?
- The solution - What have you created and how does it solve the problem?
- The Total Available Market (TAM) - It should be over $1B, which shows the market is large enough to sustain $100M in revenue.
- Market landscape - Who else is solving the problem, and how are you 10x better?
- Current traction - List key stats/plans for scaling and future customer acquisition, proof- of product-market-fit. - List out your existing product & customer traction in the form of revenue growth and usage of your product/service across customers segments as a way to prove product-market-fit
- Business model - How do you make money and what are your unit economics and gross margins?
- Team - Pics, roles, and brief bios: who you are, where you come from, and why you have what it takes to succeed.
- Fundraising - How much have you raised during pre-seed and seed rounds? How much are you raising and what will you do with the capital?
Pitch decks are living and breathing presentations that should constantly evolve based on your feedback from others during the fundraising process.
It's normal to personalize copy for specific investors and firms if, from your research, it's clear that they give weight to different components. It's also great to have appendix slides that go into detail on topics that are unique for your startup.
The purpose of data rooms is to bring qualitative and quantitative data to validate the visionary statements and traction you pitch. You’ll usually share access to a data room after you and the investor agree that there's mutual interest in moving forward in the due diligence process after a pitch.
Series A data-rooms should contain things like:
- Patents and intellectual property critical to your company.
- Financial models that showcase past revenue growth as well as future projections.
- Product demos and case studies from your users.
- Metrics that prove product-market-fit such as daily active users, monthly active users, and cohort analysis across different features.
- Capitalization tables of the number of shares outstanding to key founders, employee option pool, and past investors.
- Incorporation documents and governance materials
Don't be surprised if you'll get asked to add more specific materials to this data room through the due diligence process.
Another common request is for a list of references to critical customers for investors to validate that there is both a demand for what you're building and a strong willingness to pay.
A good fundraising process for a founder is optimized to accomplish some desired objectives.
A common objective for some founders is to maximize valuation so as to minimize dilution to the founder team. The parallel process is the go-to process for accomplishing this. The parallel process pitches many Series A lead investors simultaneously (parallel), hoping to get multiple term sheets with different valuations and use each investor's term sheet as leverage to have them compete with each other to offer new term sheets at higher valuations.
This strategy works well because if you look at the returns in venture capital as an asset class, very few companies make the returns venture capitalists are looking for. So the parallel process strategy taps into the fear of missing out on one of the few unicorns that could return their whole fund. Under no circumstance does a managing partner want to run back to their LPs saying they lost a deal like Google, Facebook, Uber, or Airbnb to another firm, just because they were scared to pay a premium on a higher valuation.
The parallel process also works great for rewarding the most value-add investor in a competitive deal. You know VC A is the perfect VC for you because they've taken a company in your space public before, but they're known for giving less-than-favorable valuation terms and refuse to join your board. You can use a higher valuation term-sheet from VC B with less domain expertise to go back to VC A and tell them that you're leaving money on the table to work with them. It usually forces VC A to get closer to VC B's terms but might be enough leverage for the partner to commit to joining your board
So you've run a parallel process with your polished investment material and somehow got through the due diligence of multiple potential Series A investors. You've timed it all perfectly, and now you have 1-4 term sheets from different VCs waiting for your signature. How do you close the round?
Once you receive a term sheet, you will be asked to make a decision and legally sign the term sheet within 24-72 hours. You can usually get this extended for up to a business work week by telling the investor that you need to discuss it with your co-founders, general counsel, advisors, and previous investors. You could get it extended even more by negotiating small provisions, but VCs might find you're stalling to shop around the term sheet and pull it if this carries on too long.
The term sheets you've received likely have a 30-day exclusivity clause that prevents you from shopping around the term sheet to other investors for better terms. This is where things get interesting; as long as you don't sign it, you don't have to abide it thoroughly, so it's acceptable for you to get multiple term sheets during this deliberation period before you've signed any. At this time, it's ok to tell them you have competing term sheets, but don't disclose who the investors are until after you've signed with your VC of choice; otherwise, the firms may collude to lower your valuation.
Once you've officially decided which investor will be your partner on the rest of your journey and signed their term sheet, you'll likely go on a celebratory dinner. The funds should be wired into your startup's checking account in a couple of business days, and then it's back to building as usual. You now have to start mastering the art of board meetings and have a new sounding board to help you as you hit the milestones needed to raise your next round, Series B.
How Long Should Series A Funding Last?
How long Series A funding should last depends on many factors that vary across industries. The general piece of advice is that it should last as long as you and your team need to either:
- Obtain enough market share to be profitable but keep growing at a steady rate without having to raise money again (default-alive).
- Hit the product and revenue milestones that future Series B investors expect to unlock another potential funding round.
Since building technology is expensive, this usually translates to 14-18 months worth of operating cash flow (burn rate) until you may run out of money (runway). You'll be self-sufficient and gain months of runway if you find profitability.
3 Examples of Series A financing
Earlier this year, Mantra Health, a digital mental health clinic for young adults in universities, raised a $22M Series A led by VMG Partners with other investors participating in the round like New Market Venture Partners, Elements Health Ventures, 14W and Alumni Ventures.
Canopy Servicing is another remarkable case study, which raised a $15M Series A in August 2021. Canopy sells financial software that allows other fintech startups or institutions to quickly provide loans to everyday consumers. According to the TechCrunch report, Canopy's valuation grew by 5x from its seed round because it grew revenue 4.5x year-over-year using the funds from their previous $3.5M Seed round.
On the extreme, Moonpay, the Miami-based company that provides crypto payment solutions, raised a $555M Series A financing round. Moonpay leveraged the crypto hype to a term-sheet at a $3.4B post-money valuation led by Tiger Global Management and Coatue with participation from Blossom Capital, Thrive Capital, Paradigm, and NEA.
There you have it - we covered what Series A financing is, how to determine when and how much to raise and how long it should last, what material you will need to raise it, and how to succeed.
You should feel comfortable with what lies ahead to close your Series A. The Failory team will always will be here to continue providing the content you need. We are excited to be a sounding board for the rest of your startup journey.