You’ve been hard at work growing your start-up, and perhaps you’ve navigated through one or two seed-stage funding rounds.
Things are going well, but you’ve got a great vision for your young start-up. And to realise that vision, you need some fresh investor capital.
It’s time to play with the big dogs and get some Series A funding.
But what does that involve exactly? And how do you know when you're ready? Follow along for a step-by-step guide to finding the right investors.
The Series A funding round is also known as the ‘puberty stage’ for companies. It’s a start-up’s first formal encounter with institutional investors and fundraising processes with venture capital financing (VC).
At the Series A stage, investors put money in your start-up in exchange for equity or ownership. It involves more significant funding than in previous rounds, averaging around 15.7 million USD as of June 2020.
Getting to Series A can be challenging, however. Fewer than 10% of companies who successfully raise a seed funding round can also secure a Series A investment.
To raise a Series A successfully, you need to show your investors you have product-market fit and exciting growth potential.
Product-market fit means your target customers are actively buying and using your product. They’re also telling other people about how great your product is at solving their problems. Product-market fit is that “magical moment where your customers become your biggest salespeople.”
You know when you’ve achieved product-market fit when you see evident growth for your company and positive feedback from different customers.
Now, if you’re with the successful 10% and manage to raise a Series A round funding, you and your fellow founders will need to give up a percentage of ownership to bring in those new investors.
There will also be significant changes in how you operate your start-up. You’ll need to look at managing a board of directors, scale your working processes and set up a mature organisational structure.
You’ve successfully brought in a few million dollars. Now what? Start-ups typically use Series A funds to expand their business significantly.
For putting millions of dollars into your business, investors will receive a portion of ownership or equity of your start-up. They’ll also expect significant returns on their money, estimating a 200% to 300% return.
Expect this to have implications on your business plan and growth goals.
Seed funding refers to smaller investments in the very early stages of a start-up’s life, while Series A funding is the first big sum of investment money coming in. It’s a huge step forward and that means there are a few critical differences.
Unlike a seed financing round involving individual angel investors or less formal means of capital like friends and family, Series A funding rounds are dominated by venture capitalists.
You’ll need to follow a documented process to raise a successful round, like participating in investor due diligence, valuation and signing terms sheets.
In return for investing in your start-up, expect to give up about 20% to 35% of your start-up. Your chosen investor will also appear on your company board for the next ten years at least and can influence company decisions. It’s crucial to find an investor that you trust and can cooperate with.
In seed funding rounds, investors put money into the quality of a start-up’s story and the early development stage team.
Series A expectations are different.
Raising a successful Series A requires you to show how your start-up is an attractive investment opportunity. You need to demonstrate product-market fit and a positive track record. Investors also look for a clear vision with a huge potential to scale.
What about a pre-Series A round?
A pre-Series A round is the mid-round between seed-funding and Series A.
Early-stage companies use the money from a pre-Series A round as a breather to meet short-run needs between two funding milestones.
Investors participating in a pre-Series A can also promise follow-up funds if the start-up meets certain milestones in a specific time.
Pre-series A rounds for early-stage companies usually have a value of 500,000 to 2 million USD.
Getting Series A investors for your start-up will change your life forever.
But let’s not start dreaming yet; it won’t be easy. Finding the right investor to invest the exact amount you need, won’t just happen in a few days. You need to be mentally and financially ready.
Raising a Series A is about convincing investors that your company is ready to scale enough so they can make money.
To accomplish this, you need proof of product-market fit. For example, with business metrics that show there’s an active market-leading interest in what you have to offer.
These are some of the metrics and tools to look for:
The good thing is, you don’t need to be profitable at this stage. But your metrics need to show an active market that’s keen on your offer, and there must be a clear opportunity for growth with more funding. Learn how you can create a data room for investors which include all key metrics they look for.
Investors will expect to see associated progress based on these factors.
Series A investors scrutinise your product offering or service. Before attempting to raise a Series A, your product or service should have a clear value proposition, potential market, and a defined strategy on how you’re going to serve that market.
You should know your product and business model very well. Show this by preparing concise answers to questions like:
Compared with seed funding, Series A funding follows a well-documented process, and therefore, it can take significantly longer than you expect.
Factor in time for due diligence, follow-ups, finding and meeting investors, and managing the pitch process.
If you can’t leave your business at least partly unattended for a few months, you aren’t ready.
Make sure you have enough cash to fundraise without having to worry about paying the bills next month. And the months after.
On top of covering your operational costs, prepare for additional out-of-pocket expenses associated with raising funds: Engaging professional services like lawyers, tax advisors and accountants costs an average of 5% of the total funding amount.
Fundraising is also a significant time commitment if you want to see results.
Expect the fundraising process to be physically and emotionally draining. Fundraising can take up more than half of your day and creative energy.
You’ll need to do this on top of your day-to-day responsibilities related to running your company. Either shift your duties to another co-founder or think of ways to use your limited time in fundraising mode more efficiently.
Feeling ready to get started?
Let’s set you up for a successful fundraising effort. Start with thorough preparation and well-thought-out processes.
In this section, we’ll cover how to:
When you head out there, you often only get one chance to meet with potential investors. And your chances of being rejected are incredibly high.
Each fund partner makes only 1 to 3 investments a year in start-ups at the Series A level and beyond.
That’s why investors are heedful of any start-up that comes to them asking for funding. Series A investors look for start-ups with the potential to scale to a multi-billion dollar business.
Your job is to communicate that story clearly and credibly while showing you have the determination and plan to get there.
And it all comes down to preparing a pitch that will blow the investor’s socks off.
“I’ve got a fantastic product, and I’m now seeing promising traction in the market. My key customers are super excited about it as it solves their pain points like no one else can. They now actively refer other customers to me. Based on current traction, there’s potential to scale and expand our business significantly in the next 12 months. I explain every step of the process in my documented business plan. To reach this goal, however, I need your support by committing a certain amount of money.”
Humans love captivating stories, and pitches delivered as stories can be up to 22 times more memorable than pure data points and facts.
“The average VC receives up to 3,000 start-up pitches a year, and investors spend less than two minutes assessing individual pitch decks in 2020.”
TIP: Prepare your pitch to 70% completeness and practice it with live audiences. Speak to friendly investors and fellow entrepreneurs to test your materials and delivery and refine based on feedback. It’ll help build your confidence before you start pitching.
Your pitch deck should support your pitch and not distract people from it. Remember, investors have short attention spans, so you need to capture their attention firmly and keep hold of it for the entire length of your pitch.
No worries. Here’s how to make a pitch deck that will keep investors at the edge of their seats.
A good rule of thumb to structure your content is investor Guy Kawasaki’s 10/20/30 rule for PowerPoint decks: 10 slides, 20 minutes and no fonts smaller than 30 points.
The goal is 10 to 12 slides, but there’s room for some extra. However, you shouldn’t have more than 15 slides, even if you need more to show in-depth business traction.
It’s also good practice to include an appendix to help support your answers during the investor’s Q&A round.
Write out a list of potential questions from investors, and have data or visuals to support your answers in the appendix as reference material. This section will expand as you start pitching and investors come up with new doubts.
Theory and tips are great to get you started, but sometimes you just need to see how it’s done. So here are three examples of successful Series A pitches.
An investment memo is a tool to communicate your company’s fundraising narrative with a written document.
If you can write well, add investment memos to your arsenal to help build relationships with investors.
Sending investment memos before pitching a potential investor is a simple yet effective way to:
Writing a solid investment memo also helps you later on in the funding process. A VC firm that wants to give you a term sheet writes an internal investment memo to help convince other stakeholders. Writing one cuts out a lot of the work for them, and ensures you control the presentation of your company.
You’re now ready to head out and find potential investors for your Series A funding round. Remember, successful fundraising hinges on building trust with potential investors in the long term, so treat the process with the care it deserves.
Aim to start at least 6-12 months before your goal to finish the fundraising process to allow enough time to nurture relationships and determine the next steps for your business.
Finding the right Series A investor happens in two stages:
Build a list of 15-20 investors whom you can think of as potential partners for the entirety of your start-up’s life.
Remember, a Series A lead investor typically buys at least 20% of your company. So they can strongly influence your company’s direction for the next ten years.
If you want to find a suitable partner
Next, you need to build relationships with them gradually. Focus on a group of three to five investors at a time for maximum results. Start scheduling casual meetings with these investors once every two months or once a quarter to create an initial connection.
Aim to impress and engage your potential investor without sharing so much about your company that they can fully evaluate an investment decision. Remember that you’re not fundraising yet, just making connections.
Do: Share high-level revenue and growth figures to pique an investor’s interest.
Do: Be clear to your potential investor about when you’re going to raise money.
Don’t: Share access to your detailed business metrics, full customer breakdown, churn figures or financial projections.
Investors prefer to decide after every meeting with potential investment opportunities if they wish to invest in the company or pass on the chance to look at a new company.
You want to share just enough to pique an investor’s interest so they keep you on their list without making a final decision.
If what you share intrigues an investor and they ask for more detailed metrics, here’s one possible answer:
“Hey, I'm not fundraising right now. I want to build this relationship because when we do go out and fundraise, I want to know if you’re the investor I want to work with….” (Source: Y Combinator)
Focus on keeping these relationships warm and provide updates on your progress so your potential investors can keep you top-of-mind when you’re fundraising.
This process may seem tiresome, but it ensures you have a ready list of strong investors to speak to. You also reduce the risk of getting a term sheet from an investor you don’t want to work with.
When you start fundraising, things can get overwhelming. Losing track of your schedule or mismanaging timing can completely ruin your fundraising efforts. You’ll need to stay in touch with different parties and send the correct information to the right people.
To avoid errors, you’ll need a meticulous and systematic project management tool.
Tips for running an excellent fundraising process overview
What if you get a preemptive offer from an investor?
Preemptive offers happen when an inside investor offers to invest in your company before a formal fundraising round. An investor gives you a term sheet in a preemptive bid while skipping the usual investor pitching process. They can also tell you that an offer exists verbally without going into further details.
When you choose an investor, you should always keep in mind that they'll become your partner for the long run, and they can influence the direction of your business. Evaluating them is as crucial as evaluating an additional co-founder.
After you’ve been pitching and meeting with investors for a while, you should have a few potential lead investors who seem keen on offering you a term sheet.
You’re almost there, but not quite yet.
Series A funding introduces three new concepts in the final stages: Due diligence, business valuation and term sheets.
Here's how this works and how to negotiate the best deal for your start-up.
During the diligence phase, investors scrutinise your numbers and business metrics to validate the opportunity. Have your customer references as well as detailed business and financial projections ready. Compiling documents for lawyers late in the process can extend your closing process by a week or more.
The due diligence process is also the best time to get to know your VC partner and determine if they’re a good fit for your business.
Note: Due diligence can happen before or after participating in partner meetings but concludes before you and your investors agree to terms and close the deal.
See Y Combinator’s full diligence checklist for Series A funding here.
Business valuation is the process of estimating how the story and product of your start-up translate into dollars.
The valuation process analyses your business on operational and strategic levels to create assumptions for your future earnings and growth rates. Some investors may ask you for a valuation number when you’re fundraising.
Why is this important in the fundraising process?
One method investors at the Series A stage use to determine valuation is by comparing similar companies in your industry. They look at how many times their valuation is bigger than their actual revenue. These are called multiple numbers. Multiply your revenue by this number to get your valuation.
Note: You don’t have to give your investors a specific valuation yet at this stage of your business.
If you’re unsure and investors ask you for a number, you better wait for them to offer.
However, you do want to work with your advisors and team to set a theoretical valuation range. Rely on investor meetings and comparisons with other companies in your industry to help you get the correct range.
Focus on persuading your investors about the business opportunity and plan you have to make it happen, rather than over-focusing on your valuation number.
You could also work with a third-party valuation to help you determine a fair value for your company.
A term sheet summarises investment deal terms. It’s a non-binding document but serves as a basis for more detailed, legally binding records (also known as the stock purchase agreement).
Your only opportunity to get competing offers from other investors is the time after you get the term sheet and before you sign.
All term sheets come with 30-day exclusivity clauses, which prevent you from approaching other investors after signing.
Here’s how to handle this delicate situation as best as you can.
Inform other funds you’re speaking to that you have a term sheet: Keep the firm’s that offered you the term sheet confidential, as investors will talk to each other outside your formal meetings.
Read and understand the offers to compare terms: Take the time to understand standard market terms, especially financing and employment terms. When in doubt, consult a professional expert for advice.
Ensure every term is crystal-clear and documented: Every point you make or negotiate must be written and explicit in the legal agreement. Confirm things agreed on in writing. Terms you agree on in your Series A funding can follow you into future fundraising efforts. Take the time to get them right the first time.
Know what’s essential to you: Terms like board control, vesting of founder’s shares, or investor veto rights should be evident in the term sheet. Make sure the terms you discuss with your investor also end up in the term sheet.
Once you’ve received a term sheet, you’ll be asked to decide within 24-48 hours. If needed, you can ask for a time extension by clarifying how much time you need and saying it’s to discuss with your co-founders and professional advisors.
You don’t want to wait too long, though, and risk upsetting your investor and losing the term sheet offer.
You’ve just accomplished a massive task, so take some time to celebrate and relax.
Then it’s time to get back to business and grow your company with the fresh funds.
Start executing your suggested improvements:
And when all seems to be running smoothly, you can start thinking about a Series B.
Focus on these metrics after raising a Series A round to figure out if you’re ready for the next step
Series A funding is the critical moment when your young start-up grows up and becomes a mature organisation.
Thanks to this step-by-step guide, you have a clear understanding of what it takes to prepare for a successful funding round. Start gathering your data, and feel free to explore the Aspire Founder Academy for more detail.