Series A financing is a term used to describe the first round of formal VC investment in your startup company. If you think about the funding lifecycle of a startup, Series A financing is the round that immediately follows the seed financing round. If the seed financing round was all about “planting the seed” for future growth, then the Series A financing round is all about scaling up. It’s time to build a working prototype of your product (or, better yet, a commercialized, market-ready version of your product), make your first official management hires, and begin your journey to profitability.
There are several essential differences between seed financing and Series A financing. First of all, we’re talking much higher dollar amounts here. Seed-stage funding might top out around $1 million (and $2 million maximum), but Series A financing is usually in the $2 million to $15 million range. As a general rule of thumb, you should look to raise an amount of money from venture capital investors that will give you an additional 12 to 18 months of runway. A lot depends on the size of your team, the sophistication or complexity of the product you are trying to bring to market, and your ability to come up with products or services that can generate revenue while you are working on your “bet the company” core product.
Another critical difference between seed financing and Series A financing is the length and complexity of raising the money. This makes sense, though, if you take into account how much money venture capitalists stand to lose if things go wrong. They only have a limited amount of powder, and they want to make sure they get the biggest bang for their buck. Thus, you might spend six months or more lining up investors and convincing them to get aboard your Series A round. This can require hundreds of cold calls, lots of investor pitches, and a very extensive due diligence process. For example, if you tell venture capitalists that you have a working product, then they will probably want to speak with your initial users (even if they are only “beta testers”). If you say that you have market research showing proof-of-concept, they will probably dig deep into the numbers to challenge your assumptions.
Moreover, Series A financing is usually going to require legal representation. Angel investors might be happy if you email them a pitch deck, but venture capitalists are going to need a formal term sheet and specific protective provisions (such as provisions restricting what you can do with their money). Depending on how much money is at stake, some VC firm might also require a board seat on a formal board of directors so that they can have a formal say in any future strategic direction of the company.
In addition to providing much-needed capital (which will be wired into your bank account), venture capitalists can also provide mentoring, strategic oversight, and access to all their connections in the industry. They want you to grow as quickly as possible, and they may end up taking a very hands-on role if you are having trouble reaching key milestones and benchmarks. Once you’ve raised your Series A round, it’s time for follow-on financing, in the form of a Series B round.