How To Raise a Series A Round
Several hundred Kruze clients have raised Series A rounds – and our team has seen what it takes to get a Series A change over the years.
VCs can be a fickle bunch, and what’s important one year may not be as important the next.
In this guide, we’ll lay out what we’ve learned over the years on how to run an efficient process, how to make sure your startup has the metrics that are needed in your particular industry, and share some resources that will help you pitch and close investors.
Let’s go for it!
KRUZE VP OF FINANCIAL STRATEGY
The Series A fundraising process
Once you’ve built a seed-funded startup that requires further capital, you’re going to need to raise a Series A round. The process takes time and effort – and the more prep work you put in ahead of the round the more likely you are to succeed. We’re going to review the fundraising steps in detail, so you know exactly what you need to do to find investors, prove your company’s value, and close the deal. Here’s a breakdown of the process.
- Critical business milestones
- Typical financial metrics
- Identifying suitable investors
- Building relationships
- Pitching
- Negotiating – valuation and terms
- Managing your seed investors
- Organizational readiness
- Essential documentation
- Metrics backup
Achieving the milestones and metrics to raise Series A
How do you know when you’re ready to raise a Series A round?
First, remember that it’s a process, and could take several months. Don’t wait until you’re at the end of your cash runway and your startup’s running on fumes.
You’ll need to start at least six months from your zero cash date – and it’s a good idea to get started even sooner than that.
(Scroll down to our section on building relationships with VCs for more on when to get started.)
Know your zero cash date
Does your VC-backed startup need help to manage your books, burn, and projections?
But what other indicators will investors want to see when they’re considering writing you a check?
Your startup will need to hit some essential milestones and achieve certain metrics to be appealing for Series A funding.
Milestones are specific goals or achievements that you set for your startup.
Metrics are quantitative indicators that demonstrate your startup’s performance.
Industry-specific metrics and milestones to raise a Series A
It’s important to note that while there are general milestones and metrics that apply to a lot of different startups, there are also milestones for specific industries that you should know about. Even individual venture capital funds can have milestones that they want to see to provide Series A funding. Examples could include:
- For SaaS companies, you probably need minimum annual recurring revenue (ARR) of $1 million or more with customer churn of less than 3%. We are also seeing VCs look for SaaS businesses with 80% or higher gross margins and burn multiples better than 3.
- For a marketplace company, you probably need minimum annual revenue of $500,000, with a minimum revenue growth rate of 2X.
- Biotechnology companies may need to have reached specific stages in drug development.
These are general examples – your task when fundraising is to determine which specific milestones and metrics your investors will want to see for your company and industry. To figure these out, do research, talk to your current investors, and network with founders who are ahead of you in fundraising. Ask what metrics your current investors would want to see, and ask other founders what metrics they showcased when raising Series A.
Let’s look at some other general milestones and metrics you may need to showcase when fundraising.
Critical Business Milestones
When raising a Series A round, founders want to know what their startup should look like to appeal to investors. Primarily, you’re going to want to demonstrate that you have a solid product-market fit. Your startup has identified a big enough problem with minimum viable market segment, you’ve got a clear value proposition, and you’ve got demonstrable, repeatable success in marketing and selling your product. Some of the milestones you might want to outline for Series A investors include:
Market
- A large and growing market opportunity. Some startups will need to prove that there is a market for their product, whereas others are attacking an already large market. If you are in the camp that has to prove that there is a market, use your seed funding to build the proof points that will convince VC that the market opportunity is huge.
- Deep knowledge of your competitors. Good ideas are never lonely, so having competitors is actually a strong validation of your idea. Know your competitors and be ready to explain their approach and how yours differs.
- A detailed understanding of the drivers for your market. These are factors that influence demand for your product, like economic conditions, customer preferences, and regulations.
Product-market fit
- High usage and low customer churn. This shows that customers like your product and continue to use it. Be prepared to explain that you understand your customer churn and how you’re addressing it.
- Satisfied customers that you can validate. If your product is B2B, you’ll need key customer references, while B2C startups want to show strong user engagement.
Go-to-market strategy
- Marketing and sales success that’s repeatable. You need identifiable target customers, a documented sales process, and of course a growing customer base.
- Willingness to pay more for the product. To find out if your customers would pay more for your product, you’re going to need to ask them through surveys or focus groups.
- A decreasing sales cycle. A sales cycle that’s getting shorter shows that you understand your customers’ needs and you’re getting better at meeting those needs.
- A decreasing customer acquisition cost (CAC) (more on this under metrics). Decreasing CAC means that you’re more effectively marketing your product. You’re learning what methods work best and streamlining your sales process.
Team
- Solid leadership. That means you, specifically, and your upper management team. You need to demonstrate that you’ve got a vision, and you’re able to articulate that vision and get people to buy in. However, vision needs to be coupled with attention to detail – since you can’t do everything, you’ll need to show that you’ve delegated critical areas to expert staff.
- A strong team. When you’re ready for Series A, you should have built out an entire team, based on your insights into your market. Who you’ve hired is important, but why you hired them is even more important. Show how your employees fit the needs of your company and your market.
- Proven ability to hire great talent. You are going to use a huge percent of the Series A funds to hire a bigger team, so you need to be able to brag about how great the team you’ve already hired is.
Important Business Metrics
While every startup is unique, there are some patterns and metrics that VCs use to measure how attractive an investment a startup company might be. Some of the common metrics that you’re going to need to cover in your pitch include:
- Revenue. This is probably the biggest indicator of a startup’s performance – at least for most startup industries (obviously biotech and many hard science startups will not have revenue at the Series A). It’s the money brought in by the startup’s business activities, and it’s calculated by multiplying the sales price by the number of units sold. VCs typically look at net revenue (also known as the bottom line), which is calculated by subtracting the cost of goods sold (COGS) from gross revenue, which is the total of all money generated by the business. Net revenue gives a better picture of a startup’s actual performance.
- Annual recurring revenue (ARR). ARR is the total of all the yearly recurring money paid by customers. It’s largely used by subscription businesses (SaaS) with yearly or multi-year contract agreements with customers.
- Revenue growth. This is the percent that revenue increases over time. It’s calculated by looking at periods of time (months or years), subtracting the previous period’s revenue from the current period’s revenue, and dividing that by the previous period’s revenue. Revenue growth shows your startup’s growth trajectory and momentum.
- Gross margin. Gross margin is a financial metric that represents the percentage difference between a company’s revenue and its cost of goods sold (COGS). It’s a key indicator of a company’s profitability and operational efficiency at the most basic level of production. To calculate gross margin, you subtract the COGS from the total revenue and then divide that figure by the total revenue.
- Net profit. This metric, also called net profit margin, shows how much net profit is generated as a percentage of revenue. It’s calculated by subtracting all company expenses from total revenue to get net profit, and then dividing net profit by total revenue.
- Burn rate. Burn rate refers to the rate that a startup is depleting its cash reserves. Burn rate is calculated by totalling all operating expenses (things like rent, salaries, and other overhead) and is usually stated on a monthly basis. Dividing your startup’s cash by the monthly burn tells you how many months you can continue operating without more funding, which is your runway.
- Burn multiple. This measures how efficiently your startup uses capital. The calculation is simple – just divide your burn rate for a given period by the net new annual recurring revenue (ARR). Burn multiples can be calculated for a year, a quarter, or a month. The lower the burn multiple is, the more efficient your startup is.
- Financial projections. While startups can be unpredictable, you still need to present financial projections. Your financial forecast communicates your business strategy and how you plan to reach your milestones through things like hiring, marketing, and liquidity. You’ll need at least a three-year financial model that’s dynamic so you can easily change assumptions. That lets you test your assumptions by changing growth rates, sales conversions, burn rate, and more. We provide free financial models that startups can use.
- Cost of goods sold (COGS). This is the amount it costs you to directly produce your products or deliver your services. Investors will be checking to see if your production strategy is solid. How do you source your materials? How do you store and transport your inventory? Does your staffing plan line up with your growth projections and will your business scale?
Not every one of these metrics will line up with every startup, but this gives you an idea of the key performance indicators (KPIs) that Series A investors are looking for. As you build your pitch deck, make sure you highlight the metrics that your investors will want to see.
Building Your Pitch
Your pitch deck is a visual presentation that provides potential Series A investors with a concise overview of your business, its value proposition, market opportunity, and financial projections. At this point you probably have pitched to other investors, but a Series A fundraise is going to require more detail than you provided in earlier stages. But don’t worry – we can help. Kruze Consulting offers free pitch deck templates that you can download and use. In addition, we have a free online course that takes you through building a pitch deck, page by page. Here’s a brief explanation of the key components typically included in a Series A pitch deck (you’ll find detailed discussions in our pitch deck course):
- Introduction. Start with a compelling introduction, including your company name, logo, and a tagline that encapsulates your mission.
- Problem statement. Clearly articulate the problem or pain point your product or service addresses. Demonstrate a deep understanding of the market need and the significance of solving the problem.
- Solution. Present your product or service as the solution to the identified problem. Highlight key features and unique selling points that set your offering apart from competitors.
- Team. Introduce the founding team members, highlighting their relevant experience, skills, and accomplishments. Remember, investors place a strong emphasis on the team’s ability to execute the business plan.
- Milestones and traction. Showcase key achievements, milestones, and traction your company has gained since its inception. This could include user acquisition metrics, revenue growth, strategic partnerships, or product launches.
- Market opportunity. Provide a comprehensive overview of the target market, its size, and the potential for growth. Showcase your understanding of market trends, customer demographics, and any competitive advantages.
- Sales plan. What’s your go-to-market strategy? You’ll need to show how you get your product in front of customers and close deals.
- Market positioning and competition. Define your company’s position in the market and showcase a competitive analysis. Highlight your competitive advantages and explain how you plan to maintain or strengthen your market position.
- Operating plan. Clearly explain how your company plans to generate revenue. Outline your pricing strategy, sales channels, and any partnerships that contribute to your business model.
- Financial projections. Provide detailed financial forecasts, including revenue projections, expense breakdowns, and cash flow statements. Be transparent and realistic, demonstrating a clear path to profitability.
- Investment ask and Q&A. Clearly state the amount of funding you are seeking in the Series A round and how you plan to allocate the funds. Then invite questions – and make sure you provide answers! It’s okay to say that you’ll get back to them, as long as you do it in a timely manner.
- Follow-up discussions. Be responsive and open to follow-up discussions with your potential investors. Address their concerns and provide any additional information they may require.
Remember to keep the pitch deck concise, visually engaging, and focused on the most critical information. It should serve as a compelling tool to generate interest and discussions with potential investors.
Meeting and Closing the Right Series A Investor
If you’ve decided to pursue a Series A funding round, the next step is finding the right investors. Investors invest in people as much as they invest in ideas. To find the right investors for your startup, you need to establish relationships with potential investors. Some strategies to do this include:
- Build relationships early. Start building relationships with potential Series A investors well before you actually need funding. It can take up to six months to close a Series A round. It’s no exaggeration to say that founders should always be looking for their next investors, but you should probably start at least a year before you need funding. Attend networking events, conferences, and reach out through mutual connections. Building rapport early can make the fundraising process smoother later on. VCs really want to think that they’ve gotten to know you, so the longer they’ve had to interact with you and see you execute, the better.
- Create a compelling “elevator pitch.” You’ve already built your pitch deck. Now you should distill that into an “elevator pitch” that you can use when networking. Craft a compelling story about your startup’s mission, vision, and potential impact that you can deliver in two or three minutes. Show them evidence of product-market fit, user growth, revenue, or other key metrics that demonstrate your startup’s potential for success. Investors want to be inspired by the companies they invest in, so make sure your narrative is clear, concise, and captivating. If they show interest, you can provide more detail.
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Be transparent and coachable. Be transparent about your startup’s challenges, risks, and weaknesses. Investors appreciate honesty and want to see that you’re aware of potential pitfalls and have plans to mitigate them. Additionally, be open to feedback and willing to adapt your strategy based on investor input.
- Follow up and stay engaged. Stay engaged with potential investors even if they don’t immediately commit to investing. Building a relationship over time can increase the likelihood of securing funding in the future. Ask if you can send them email updates, and then send short updates highlighting your startup’s traction. Don’t spam their inbox – monthly or bimonthly updates are fine. Don’t be afraid to ask for tips or advice – that helps build trust.
Another perspective on the correct amount of capital to raise
Scott Orn answering the question “How do you answer a venture capitalist question when they ask how much capital you’re gonna raise?”
Your relationship-building activities will help you develop a broad list of potential investors. Now it’s time to decide which investors to approach:
- Understand your funding needs. Clearly define how much capital you need and what you plan to achieve with the funding. This will help you identify investors who align with your growth plans.
- Create a target investor profile. Identify the types of investors that align with your industry, stage, and business model. Look for investors who have a track record of investing in companies similar to yours. Think about your partnership and what you would like your investors to bring to the table along with funding: Do you want mentorship, networking, or strategic advice?
- Research potential investors. Thoroughly research potential investors to understand their investment focus, portfolio companies, and track record. Look for investors who have a history of supporting companies in your industry and stage.
- Tailor your pitch to the specific interests and criteria of each potential investor. Highlight how your startup aligns with their investment thesis and how their involvement can add value to your company.
- Leverage your existing network. Utilize your existing network of advisors, mentors, and angel investors to seek introductions to potential Series A investors. Personal connections can significantly enhance your credibility.
- Make the right personal connections. VCs value introductions from entrepreneurs who they know and like above all other deal sources. You should get to know founders who have taken money from the investors you want to raise from, and ask them for introductions. Founders are usually very open to providing mentorship to founders in adjacent spaces, so don’t be afraid to reach out!
- Network and attend events. Attend industry conferences, networking events, and startup pitch sessions. Building relationships with other founders, industry professionals, and potential investors can open doors to valuable introductions.
- Engage with your angel investors and seed stage firms. These early-stage investors often have connections with Series A investors and can help bridge the gap between you and potential investors.
- Talk to your lawyers, bankers, and accountants. This is a big advantage to choosing to work with service providers that specialize in startups. Lawyers, bankers, and accountants that focus on the startup ecosystem know a lot of investors, and they’re often happy to make introductions.
- Send cold emails. This method works surprisingly well, but it takes time. It’s a volume game, so you’ll need to send a lot of emails, and you’ll also need to personalize every email by researching the investor’s portfolio and social media. Keep your emails short and succinct. Based on your research, include information about your traction or another statistic you think will excite this investor (remember: short!) and include a link for the investor to find out more about your startup.
Remember that venture capital firms are looking for high-growth opportunities with a combination of market potential, innovative solutions, capable leadership, and clear pathways to success. Startups that meet these criteria are more likely to attract investment and support from VC firms.
What are VCs looking for in today’s market?
Gautam Gupta of TCV discusses what it takes to fundraise right now, including an emphasis on company fundamentals, significant gross profit margins, what to call out in a pitch meeting, and what to look for in a term sheet.
Managing your seed investors when you’re raising a Series A
While Series A funding can dilute seed investors’ ownership, it’s a positive step for the startup’s growth. Seed investors provided initial funding to get the startup off the ground. When a Series A round occurs, seed investors often see a dilution in their ownership stake in the company. This means their percentage ownership of the company decreases because new investors, typically venture capital firms, are providing new capital in exchange for equity.
However, if the startup succeeds and its valuation increases (see the section on valuation below), the value of the seed investors’ remaining shares may also rise, potentially offsetting the dilution. In some cases, seed investors may also have the opportunity to participate in the Series A round to maintain or increase their ownership stake.
When raising a Series A round of funding, startup founders should carefully manage their relationship with seed investors to navigate the transition smoothly. Here are some key steps:
- Acknowledge their contributions. Recognize the role seed investors played in the company’s early stages. Express gratitude for their support and involvement, emphasizing their importance in getting the startup to where it is now.
- Maintain transparent communication. Keep seed investors informed about the company’s progress, plans, and the fundraising process for the Series A round. Transparency builds trust and helps manage expectations.
- Prepare them for dilution. If your seed investors aren’t professional investors, such as friends and family, you may need to educate them about the potential dilution that may occur as a result of the Series A round. Explain how new investors will affect ownership stakes and reassure them about the long-term growth prospects of the company.
- Offer participation. If you can, provide seed investors with the opportunity to participate in the Series A round. Allowing them to invest further can help maintain their alignment with the company’s goals and potentially mitigate their dilution concerns.
- Provide exit options. If your seed investors are looking for an exit, discuss potential options such as secondary sales or liquidity events. Try to balance their needs and preferences with the interests of the company and its new investors.
- Facilitate networking. Introduce seed investors to the new investors participating in the Series A round. Facilitating connections can foster collaboration and create a supportive ecosystem around the company.
- Continue regular updates. Even after the Series A round is closed, continue to provide regular updates to seed investors. Keeping them engaged and informed reinforces their sense of involvement in the company’s journey.
Handling your seed inventors’ pro rata rights at the Series A
As your startup transitions from seed to Series A funding, managing the pro rata rights of your seed investors is critical. Pro rata rights allow investors to maintain their percentage ownership in the company by participating in future funding rounds. This section can become particularly contentious if your company is performing well and Series A investors aim to secure a larger share, potentially at the expense of your seed investors’ interests. Here’s how to navigate this sensitive area effectively:
Understanding Pro Rata Rights
First, it’s essential to have a clear understanding of what pro rata rights entail and which of your seed investors hold these rights. Typically, pro rata rights are granted to early investors as part of their initial investment agreement. This gives these earlier inventors the right to purchase a certain percentage of shares in subsequent rounds, usually in an amount that helps them avoid dilution of their ownership stake.
The first thing to do, as a founder, is to get with your lawyers and understand how many shares, and how much money, is going to be spoken for from the pro rata rights. You’ll need to then compare this to the round size and the amount of ownership and dollars that the lead inventors in the Series A want to invest. Again, your law firm should help you with this. Do the math to see if you are oversubscribed. If you are, it’s time to talk with the new investors, and then the existing investors.
Existing investors will often state that they have a right that they purchased; and the Series A investors will retort that they are the ones putting in the cash in the Series A, so too bad.
Founders really, really need to understand what the ownership targets are of the new investor. If you don’t give the new investor enough ownership, they may bail on the round. However, this is pretty rare, and most investors can relent a bit and give up a few basis points to preserve ownership for earlier inventors who the founder goes to bat for.
Founders should also think hard about which existing investors have really driven value to the company. Talk with your lawyers about how you can safely allocate what pro rata there is to the investors who you think deserve it – but again, work with your attorney on this.
Managing your seed investors during a Series A fundraising requires a delicate balance of appreciation, transparency, and strategic communication. By effectively navigating this process, startup founders can strengthen your relationships with existing investors while successfully securing the capital needed for the next stage of your startup’s growth.
Negotiate your terms carefully
Once you’ve got an interested investor, you’ll need to negotiate terms that are fair and align with the long-term goals of your startup. This isn’t a do-it-yourself situation – you should seek legal advice to make sure that the terms of the deal are in the best interests of your startup, your employees, and you. Your Series A negotiation is going to set a precedent for all your future funding rounds, so you need to make sure the terms are as favorable as possible. Again, make sure you are working with an experienced startup lawyer!
The term sheet outlines the key conditions and terms under which your Series A investors are willing to invest in your company. Here’s a brief explanation of how you should approach negotiating a Series A term sheet:
- Understand your priorities. Before entering negotiations, have a clear understanding of your company’s priorities and long-term goals. Identify the terms that are non-negotiable for you, and the terms that are more flexible. You may want to even draft up the element that you want to see in the term sheet before a VC sends you theirs.
- Research. Research typical terms in Series A deals within your industry and region. This will give you a benchmark for what is considered standard and reasonable, helping you make informed decisions during negotiations.
- Consult legal and financial advisors. This can’t be overstated – engage legal and financial advisors with experience in venture capital deals. You’ll need their expertise to navigate complex terms, understand potential implications, and make sure that the agreement aligns with your best interests.
- Document the process. If you have a phone call or an in-person meeting with a VC, follow up with an email that highlights what you discussed. Ideally, you’ll get a confirmation email back, but if not you’ve documented everything in writing.
- Focus on valuation. Valuation is a critical aspect of the term sheet (see below). You want a fair valuation that reflects your company’s worth, so be prepared to justify your valuation based on financial projections, market potential, and traction.
- Consider control and governance. Carefully review provisions related to control and governance. Be mindful of board composition, voting rights, and protective provisions that may affect your ability to make key decisions. You want to find a balance that allows for investor input while preserving your operational flexibility.
- Carefully review liquidity preferences. Pay attention to terms related to liquidation preferences. Understand the preferences of investors in case of a sale or liquidation, and make sure the terms that align with your long-term goals.
- Understand employee stock option (ESO) pools. An employee stock option plan can be an important tool to attract top talent and incentivize employees. However, if new shares are created for the Series A round, and the startup sets aside a pool of stock shares to issue to employees, the founder’s percentage of ownership in the company is reduced, or diluted. That’s important for founders to understand. The trade-off between dilution and increased employee motivation and retention can also affect your startup’s valuation, depending on how your investors view the option plan.
- Protect your rights as a founder. Negotiate for fair treatment in the event of future funding rounds, exits, or changes in control.
- Anticipate future issues. This may include anti-dilution protection, pre-emption rights, and other provisions that safeguard your interests in various situations.
- Be ready to compromise. While it’s important to advocate for favorable terms, be prepared to compromise on certain points. A successful negotiation strikes a balance that satisfies both parties.
- Honor your agreements. If you’ve agreed to something officially, whether written or verbal, don’t break the agreement. Successful negotiations are built on trust, and your reputation is an important factor in that. Breaking agreements can damage your reputation quickly.
Remember that negotiations are a give-and-take process, and you’re going to be working with your investors for years. A positive, collaborative approach will lead to a much better outcome for both parties. Thoroughly review the term sheet, seek professional advice, and make sure that the final agreement aligns with the best interests of your startup.
How do VCs value Series A startups?
Ultimately, the valuation of a Series A startup is a negotiation between the founders and the investors, taking into account various factors and methodologies to arrive at a mutually agreeable figure. It’s not an exact science, and valuations can vary widely depending on the perspectives of both parties and the specifics of the startup’s situation.
The process typically takes into account several key factors:
- The startup’s stage of development. Early-stage startups are more risky investments than later-stage startups. VCs try to find companies that have a clear path to profitability.
- The size of the potential market for the startup’s product or service. Founders should remember that VCs are looking for companies that have the potential for exponential growth.
- The management team. VCs look for startups that are led by experienced entrepreneurs with strong track records of success.
- The startup’s competitive landscape. VCs want to fund startups that have a clear competitive advantage and that are positioned to dominate their market.
The startup’s financials. VCs look for startups that have a strong financial foundation.
VC investors typically employ several methods to determine the value of a Series A startup, though it’s important to note that valuations can vary based on factors like industry, market conditions, growth potential, team expertise, and more. Here’s a simplified overview of some common valuation methods:
- Market comparable approach. This method involves comparing the startup to similar companies in the same industry that have recently raised funds or been acquired. Investors look at factors such as revenue, user base, growth rate, and market potential to determine a valuation multiple. For instance, if comparable companies have been valued at five times their annual revenue, and the startup in question is projected to generate $1 million in revenue, the valuation might be set at $5 million.
- Discounted cash flow (DCF) analysis. In this method, investors estimate the startup’s future cash flows and then discount them back to present value using a discount rate that reflects the riskiness of the investment. This approach requires making assumptions about future revenue, expenses, growth rates, and terminal value. The resulting valuation represents what the startup’s future cash flows are worth in today’s dollars.
- Cost-to-duplicate method. This method assesses how much it would cost to replicate the startup’s business model, technology, team, and other assets from scratch. Investors consider factors like research and development expenses, intellectual property, and market positioning. The valuation is based on the estimated cost to recreate the startup’s value proposition.
However, most VCs are looking for startups that have a fundamental value that’s bigger than the market price. So while it’s possible to quantify many of the objective factors, VCs will often incorporate subjective factors into their funding decisions. That’s why it’s important to target VCs that know your market.
Preparing your due diligence materials
Series A investors are going to perform due diligence on your startup, to validate the information you provided, identify key risks, and assess your company’s potential for success. They’re also going to want to understand your market, the value you provide to your customers, and details of the product you offer. Anything you’ve put in your pitch deck is fair game for diligence, along with a lot of other materials.
Have your due diligence materials ready, including financials, legal documents, and any other information investors may request. Being prepared demonstrates your professionalism and transparency. Kruze provides due diligence checklists that you can download to help you prepare for diligence. Here’s a brief list of the types of due diligence materials you may be asked to provide:
- Financial documentation. You will be asked to provide detailed financial statements, including historical and projected income statements, balance sheets, and cash flow statements. Make sure to include the key financial metrics we discussed.
- Legal documents. Compile all relevant legal documents, including the company’s articles of incorporation, bylaws, shareholder agreements, and any legal opinions or memos. Additionally, disclose any ongoing or past legal matters, lawsuits, or potential liabilities.
- Intellectual property (IP). Present a comprehensive overview of your company’s intellectual property assets, including patents, trademarks, copyrights, and trade secrets. Provide details on the ownership, status, and any licensing agreements.
- Customer and revenue data. Share insights into your customer base, including customer demographics, acquisition channels, and retention strategies. Provide a breakdown of your revenue streams, including the contribution from key customers or clients.
- Operational information. Provide a detailed look into your company’s day-to-day operations. This may include your supply chain, manufacturing processes, technology infrastructure, and any key operational partnerships.
- Compliance and regulatory information. Demonstrate your company’s compliance with relevant laws and regulations (like taxes!). Include certifications, permits, and any interactions with regulatory bodies. Address any potential risks or challenges related to compliance.
- Team information. Provide detailed profiles of key team members, highlighting their expertise, roles, and contributions to the company. Emphasize any relevant industry experience or successful track records.
- Market research and competitive analysis. Share comprehensive market research that supports your market opportunity. Include an analysis of competitors, market trends, and potential challenges. Clearly articulate your competitive advantages.
- Strategic partnerships and alliances. Outline any existing or potential strategic partnerships, collaborations, or alliances that contribute to your company’s growth strategy.
Compiling a comprehensive set of due diligence materials takes some effort on your part, but it will pay off by both demonstrating transparency and by making it easier for potential investors to conduct a thorough assessment of your startup. A proactive approach to due diligence builds trust and expedites the fundraising process.
More Series A FAQs
What is a Series A?
Series A is usually the first funding round that founders obtain from venture capital investors (VCs), private equity firms, or other institutions that specialize in financing startups. Series A is typically the first “priced” round that your startup raises, which means that your investors will place a value on your company when they make a Series A funding offer. That price translates into a share price for your company’s preferred stock, which is what investors will receive in exchange for funding your startup. That equity stake means that your investors become part owners of your company. If your startup grows and either goes public or is acquired by a larger company, those investors will see a return on their investment.
Series A is probably not the last funding round you’ll need. As they grow, startups go through other funding rounds which are progressively larger and are designated alphabetically: Series B, Series C, and so on.
409A Valuations vs Series A Valuations
VC-backed startups who succeed in raising a Series A are going to get immediate pressure from their experienced investors and law firm to get a new 409A valuation. While the Series A valuation sets the stage for how much new investors will own, based on future growth potential and current market dynamics, a 409A valuation kicks in post-funding to assess the fair market value (FMV) of the company’s common stock, crucial for stock option pricing. This IRS-regulated process ensures that options are issued at or above FMV, safeguarding against tax penalties.
Understanding the difference between the Series A valuation and the 409a can be a bit confusing to 1st time founders. VCs base their investment, and thus the Series A valuation, on a blend of market potential, team capabilities, and the startup’s technological edge, how much of the company they want to own vs. their investment amount, among other factors. In contrast, the 409A valuation, conducted after the Series A round closes, uses this investment valuation as a starting point but goes deeper into financial performance and market conditions to establish stock option pricing. It’s pivotal for startups to navigate this landscape effectively, keeping in mind that the 409A valuation doesn’t just comply with tax regulations – it also reflects the nuanced financial standing of the company post-Series A, enhancing its credibility and operational integrity in the eyes of employees and future investors.
One item to consider when getting a 409A after a Series A round is the projections that the founder gives to the 409A provider. The 409A valuation report will be, in part, based on these projections. It’s tempting to use the same projections that were used during the financing process – after all, these are already done and ready! However, a smarter strategy is to use a more realistic, slower growth, higher burn set of projections. This is not only because most startups actually miss their projections, but also because it will provide a more realistic, and lower, stock option strike price.
Common Mistakes Founders Make When Trying to Raise a Series A
- Waiting until they are almost out of money. Start early so you have time to get a good process going
- Using runway as the trigger to start fundraising. VCs are looking for specific milestones based on your industry; you can start fundraising when you’ve achieved those milestones, regardless of the cash in the bank
- Not building a company toward the right milestones. VC key off of particular milestones specific to each industry, so it’s much easier to successfully complete a fundraise if your startup hits those industry-specific milestones.
- Trying to raise too much money. Every Series A investor has a sweet spot of capital that they invest; trying to raise too much (or too little) from these investors can make a deal impossible.
- Shooting for an unrealistic valuation. It’s hard to know how much your startup is worth (we’ll address this more in a bit), but asking for too high of a valuation can scare away good investors.
- Not being prepared for diligence. VCs have short attention spans, so when one shows interest you need to be ready to get them sucked into due diligence. Not having your materials ready can be a big mistake, although that doesn’t mean you can’t start pitching before you’ve got 100% of your materials ready.
- Overlooking the importance of a strong narrative. VCs need to be able to tell the story of why your company is important in their partner meetings and with their own investors (LPs). Failing to articulate a compelling story that connects your startup’s past achievements with its future potential can make it difficult for investors to see the value of your vision. A strong narrative is crucial for engaging potential investors emotionally and intellectually.
- Ignoring unit economics. Not understanding or presenting clear unit economics can raise red flags for investors. Founders need to know their numbers and demonstrate how they will achieve profitability at a per-unit level.
- Not leveraging existing investors or advisors. Ignoring the advice and networks of existing investors or advisors can limit your access to potential Series A investors. These relationships can be key to opening doors and building trust with new investors.
- Missing your numbers. Investors need to know that you can execute. Missing your revenue projections during the fundraise is a strong, negative signal.
Trying to hide negative information. Concealing negative aspects of your startup can backfire, damaging trust with potential investors. Transparency about challenges and how you’re addressing them demonstrates integrity and problem-solving skills.
How to raise a Series A Round
Raising a Series A round is an important step for your startup, and proper preparation is essential. Founders getting ready to raise a Series A round need to follow these key steps:
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Reach the milestones and metrics investors will want to see.
These are specific goals or measurable indicators that demonstrate your startup’s performance. You’ll need to find out which specific measurements are preferred by the venture capitalists you target.
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Build your pitch.
Your pitch deck gives potential Series A ihvestors with an overview of your business, your value proposition, the market opportunity, and your financial projections. Our free online course can help you build your pitch.
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Find the right Series A investor.
Start building relationships with potential investors well before you need funding. Attend industry and startup events, use your professional network, talk to other founders, ask your professional service providers (accountants, attorneys), check with your customers and vendors, and research online and through social media to develop a broad list of potential investors.
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Narrow down your target list of potential investors.
Identify investors that align with your industry, stage, business model, and values through research and networking. Establish contact through introductions whenever possible, and ask for a pitch meeting.
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Don’t neglect your seed stage investors.
Make sure you maintain transparent communication with your current investors, acknowledge their contributions, and address their questions and concerns.
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Negotiate your terms carefully.
Once a Series A investor is interested in your company, you’ll need to negotiate terms that are fair and align with your startup’s goals. Make sure you’re working with an experienced startup attorney!
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Valuation is important.
Establishing a valuation isn’t an exact science, and you’ll need to understand how valuations work.
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Prepare your due diligence materials.
Have your materials ready, including financial statements, legal documents, and other information investors may request. Our due diligence checklists can help you prepare.
Unlocking Series A Success
Securing Series A funding for your startup is a significant milestone in the life of your company. Identifying investors, crafting a compelling narrative, refining your pitch, and navigating due diligence are just a few of the things you’ll need to master to get your startup to the next level. If you have questions about Series A funding, please contact us.
