Most startups, even those who get angel funding or seed-stage funding or investments from accelerators/incubators, are unable to get follow-on funding. Why is Series-A funding so elusive?
The first time that a startup raises capital is normally called a ‘seed round’. Other names include angel round or HNI round.
Some even call it a pre-Series A round, but this term usually refers to a small interim fundraising exercise between the seed round and Series A.
1. Be series A ready
If you are looking to raise a Series A, it might be a good idea to get familiar with what venture funds looks for to ascertain if your company is Series A ready.
Promising unit economics, revenue, proof of business model, systems ready to support efficient scaling, product/market fit, customer acquisition strategy and success, quality of team are some key factors that are taken generally taken into consideration and it is wise to evaluate where you company stands against these metrics to figure if you are ready for Series A.
2. Start early
Fundraising in the current environment is a time consuming process – be realistic about the timeframe. Make sure you start the process atleast 7-8 months prior to when you want to raise a Series A financing. The deal process has two parts, pre-termsheet and post-termsheet.
Underestimating the time required inevitably leads to desperation and will often need to alter your funding strategy to include diverting attention to raise a bridge round to sustain the business.
3. Leverage your network
Seed funding is more plentiful and easier to raise as compared to Series A. Leveraging your network and building genuine relationships before you start your Series A fundraise will make it easier for you to get potential meetings with investors.
Reach out to your extended network and request them to reach out to their connections. These second degree network have powerful and favourable outcomes. Spreading word about your business through your network or through PR/marketing initiatives is always helpful.
4. Practice your “Pitch”
The key is to take as many meetings as possible. Speak to other founders who have successfully raised Series A and take their inputs for your pitch. Meet the low priority investors on your list first – they will ask you relevant question and provide you valuable feedback which you should incorporate in your pitch before meeting the top priority investors on your list. Treat the pitch a product – iterate on it until it is great.
5. Create a fundraise momentum
Approaching multiple venture funds at the same time is a good idea to get a competitive dynamic into the process. Try keeping your conversations with interested investors moving along at as close to the same pace as possible. This may not be easy but is if you manage to orchestrate well, you may be able to negotiate from a high bargaining power that generally leads to better valuation and deal terms. Nothing accelerates the process and you landing up a termsheet from one VC – you are likely to get few more.
6. Know the “standard market practice”
Keep yourself up to date with the commonly offered deal terms for a Series A. It is highly possible that the first version of your termsheet you receive is not exactly “founder-friendly”. The strongest line of defence and the most accepted rationale for negotiating such terms is that they are not standard market practice.
7. Get the deal terms right
It is imperative that you ensure that the deal terms for your Series A are right and consistent with the trajectory of your business. The Series A terms will play as a foundation for all future rounds – many of those same terms that you have signed up for in your Series A are likely to carry through to future rounds i.e Series B or Series C – hence important to get them the right the first time itself.
8. Engage a lawyer
If you’re raising venture capital — you need a lawyer who specializes in structuring venture capital financing. A lawyer who has done multiple such deals understands the nuances involved in structuring such rounds both from the perspective of which deal terms are important, what the “standard market practice” is and when to stay firm and when to concede to the investor. This will aid you to close your investment documents faster and more efficiently.
9. Paperwork in place
Shorten your transaction closing time by having all paper work in place for due diligence. Ensure that your company’s legal documentation and compliance is up to date and have your team put together all records relating to employees, past financing, corporate structure and establishment, client contracts, intellectual property, cap table, etc. The paperwork should be organized and ready for review by the Investor appointed legal counsel/diligence team.
10. Raise 10-15% more than budgeted for
Within reason, if you have access to capital and the deal terms including dilution are decent, raise 10-15% more than budgeted as the business initiatives/operations dont always materialise as planned. Raise enough to allow you a fair shot to meet your milestones for the next round of financing so that you can channel all your focus on building the business and scaling it in the right direction.
Raising every round of funding post Series A becomes significantly difficult and therefore is time consuming process and highly distracting. Additionally, there is a transaction cost every time you close an additional round.
Q1: What is Series A funding, and why is it important for startups?
A1: Series A funding is a crucial investment round for startups to scale operations. Investors provide capital in exchange for equity, enabling growth beyond initial stages.
Q2: How should startups determine their valuation during Series A fundraising?
A2: Valuation involves assessing the company’s worth. Consider factors like market potential, revenue growth, and comparable industry valuations to set a fair value.
Q3: What key metrics do investors focus on during Series A funding discussions?
A3: Investors analyze metrics such as customer acquisition cost (CAC), lifetime value (LTV), monthly recurring revenue (MRR), and gross margins for a comprehensive evaluation.
Q4: How can startups build strong relationships with Series A investors?
A4: Communication is key. Regular updates, transparency, and demonstrating a clear roadmap for growth enhance trust and strengthen the relationship with investors.
Q5: What legal considerations are vital during Series A fundraising?
A5: Startups should focus on well-drafted term sheets, due diligence, and legal agreements. Consulting legal experts ensures compliance and protects both the startup and investors.
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