Series A Financing
The next round of further startup financing, an investment which is privately held in an organization showing potential.
What Is Series A Financing?
After the seed funding, the next round of further startup financing is called Series A financing. At this stage, a company showing high revenue growth and marketing the product becomes a crucial part of the business.
Series A funding is generally used for new sales, marketing processes, and understanding the ideal customer. A company must have a long-term plan and a clear business model.
The investment in Series A funding generally lies between $2 million to $15 million. There are only a few investors as we move up in the start-up funding series from pre-stage financing to series C financing.
A company seeking Series A capital is valued between $10 million and $15 million. Venture finance, angel investors, and crowdsourcing are frequent sources of Series A investment.
Sequoia Capital, IDG Capital, Google Ventures, and Intel Capital are well-known venture capital companies participating in series A investing. It represents the beginning of institutional funding.
Analysts do a company valuation before the start of every round of fundraising. Inputs for valuations include management, track record, market size, and risk, among other things.
The valuation of the business, together with its maturity level and growth possibilities, is one of the major differences between investment rounds. These variables then affect the types of investors likely to participate and the potential reasons for a company's need for further funding.
Many startups face failure in the series A financing round due to weak value propositions, lack of product-market fit, poor execution, insufficient traction, and limited runway of money.
Objectives of Series A Financing
For three reasons, most entrepreneurial endeavors require funding in their early stages: difficult cash flow situations, large capital expenditures, and protracted product development times.
Some of the objectives are:
1. Cash flow challenges
A company's need for operating capital as the basis for providing customer service develops as it expands. For example, investing in new equipment and hiring and educating more personnel is frequently necessary before a bigger client base generates more revenue.
The lag between spending to generate revenue and earn income from the firm's operations creates cash flow challenges, particularly for new (often small) ventures and ventures that are growing rapidly.
If a firm operates in the red, its negative real-time cash flow, usually computed monthly, is called its burn rate. A firm usually fails if it burns through all its capital before it becomes profitable. This is why inadequate financial resources are a primary reason new firms fail.
2. Capital investments
Companies frequently need to raise funds early to finance capital investments. So although it could be possible for the venture's founders to fund its first activities, it gets more challenging for them to invest in other capital projects like buying property or building structures.
Note
Many entrepreneurial ventures can delay or avoid these types of expenditures by leasing space or co-opting the resources of alliance partners.
However, at some point in its growth cycle, the firm's needs may become specialized enough that it makes sense to purchase capital assets rather than rent or lease them.
3. Lengthy Product Development Cycles
In several sectors, businesses must raise capital to cover the upfront expenditures of protracted product development cycles.
For example, developing an electronic game takes one and a half and two years. On the other hand, the path to commercial licensing takes approximately eight years in the biotech industry. This tortoise-like pace of product development requires substantial up-front investment before the anticipated payoff is realized.
Source of Series A Financing #1: Crowdfunding
The modern equivalent of "passing the hat" is crowdfunding. Entrepreneurs can build a profile on crowdfunding websites, list their financial objectives, and describe how the money will be used.
Individuals can then pledge money, in exchange for some amenity, like being one of the first 100 people to try the company’s product, instead of equity or a promissory note.
Crowdfunding provides a pool of projects to select from and invest as little as $10. SEC regulates crowdfunding in the US to protect unwealthy or new investors from losing their principal. Some of the popular crowdfunding platforms include Kickstarter, Indiegogo, and Gofundme.
Crowdfunding is good for creativity like artists, writers, musicians, or podcasters by pitching their ideas to prospective investors and raising funds to sustain their life.
The following are the forms of crowdfunding:
1. Donation-based crowdfunding involves soliciting small donations from a wide variety of people, regularly in change for a few tokens of appreciation, including a T-blouse or a thank-you note.
2. Reward-based crowdfunding offers backers a tangible reward, which includes products or services, in change for their aid. Entrepreneurs and creators often utilize this crowdfunding type to test the market for brand-new products or services.
3. Equity-based crowdfunding lets backers invest in an employer or project in an alternative for a percentage of the profits. Startups and small organizations regularly use this crowdfunding type to elevate capital without using traditional financing channels.
4. Debt-based crowdfunding, also called peer-to-peer lending, includes individuals lending cash to others in change for interest payments over the years.
Note
Equity-based crowdfunding is getting popular in startup companies due to access to a large pool of investors, reduced financing costs, and more control over the fundraising process.
Source of Series A Financing #2: Angel Investors
Business angels are those who provide their own money to new businesses. A high-net-worth individual contributes money to a start-up or small firm in exchange for stock in the enterprise.
The term "angel" was first employed in finance while referring to rich New Yorkers who invested in Broadway shows.
The prototype business angel invests in entrepreneurial start-ups, has a high income and wealth, is well-educated, has achieved success as an entrepreneur, and invests in businesses in the area where he or she lives. This person has been around for roughly 50 years.
Because they are ready to make modest investments, business angels are valuable. This allows a start-up to receive equity finance with a $50,000 commitment instead of the $1 million minimum investment typical venture capitalists demand.
Many angels are also motivated by more than financial returns; they enjoy mentoring a new firm. While some groups focus on a specific industry, most are open to various areas and select those markets with which some of their members have expertise.
The Angel Capital Education Foundation lists angel groups in the United States and Canada.
Note
In many areas, local governments and nonprofit organizations are active in trying to bring entrepreneurs and angel investors together.
Source of Series A Financing #3:Venture Capital
Venture capital is the money venture capital firms invest in start-ups and small businesses with exceptional growth potential.
The fact that venture capital firms often invest later in a company's life than angel investors do is a clear distinction between the two groups of investors.
Most venture capital money goes to follow-on-funding for businesses originally funded by angel investors, government programs, or other means.
Venture capital firms are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms. The funds, or pool of money, are raised from high net-worth individuals, pension plans, university endowments, and foreign investors.
The investors who participate in venture capital funds are called limited partners. The venture capitalists who manage the fund are called general partners.
The venture capitalist who manages the fund receives an annual management fee in addition to 20 to 25% of the profit earned by the fund. The percentage of the profits the venture capitalists get is called the carry.
Following a venture capitalist's initial investment in a company, follow-on funding refers to additional investments made in rounds.
Venture capitalists focus on high-risk entrepreneurial businesses. They provide capital to new ventures, development funds to businesses, and expansion funds to rapidly growing ventures that have the potential to “go public” or that need capital for acquisitions.
Note
Venture capital is a viable alternative to equity funding as the former is extremely well-connected in the business world and can offer assistance beyond funding.
Entrepreneurs and venture capitalists
Entrepreneurs seek out venture capitalists for their money, and venture capitalists envision long-term business relationships with entrepreneurs. As a result, most VCs maintain frequent contacts helping businesses and acting as “mentors.”
VCs are often experienced business professionals who can provide valuable guidance and mentorship to entrepreneurs, helping them navigate the complex business world and avoid common pitfalls.
In addition to financial support, VCs may offer strategic advice, introductions to potential customers or partners, and access to industry networks.
While VCs can provide valuable resources and guidance, entrepreneurs should carefully weigh the benefits and drawbacks of taking on outside investment before deciding.
These relationships are as follows:
- Providing advice to management and on-board decisions.
- Introducing them to suppliers, management consultants, and distributors.
- Linking relationship between entrepreneurs and lenders.
- Developing relationships with securities firms and brokers.
- Monitoring all investor’s interests through involvement.
- Finding key resources, locations, or facilities.
- Motivating entrepreneurs through personal assistance.
- Facilitating expansion financing or IPO underwriting.
- Providing technical assistance on products and innovations.
- Acting as guarantors on loans or leases.
- Developing new customers or new markets through networking.
Conclusion
Series A funding occurs after the business development and traction seed funding. The funds raised during the Series A financing are typically used to hire additional staff, develop new products or services, and expand the company's operations.
The investors participating in the Series A round often bring expertise, experience, and connections to help the company succeed. It includes three sources: crowdfunding, angel investors, and venture capital.
Crowdfunding consists of a pool of investors with many projects to choose from based on each alternative's return on investments. Generally, it is used for creative avenues like artists, musicians, etc.
It is a popular fundraising method that has gained momentum in recent years due to the rise of social media and online platforms.
Angel investors invest in getting the company's equity, generally done in the early stage of a company's growth.
Venture capital may be used in the first stage, primarily in the second or third stage, to provide working capital for growth or expansion. Venture capital is broadly defined as a professionally managed pool of equity capital.
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