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Series A Valuation: Overview, Costs, Opportunities

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April 4, 2021

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Most successful startups raise capital through rounds of external funding.

These funding rounds provide outside investors the chance to invest in a company in exchange for equity in it. Rounds start with seed funding and then go on to Series A, B, C, and sometimes even beyond.

Businesses might spend untold months, or even years, desperately searching for funding. Other companies who experience success off the bat might bypass some of the funding stages and move more quickly through the process of building capital.

In this article, we’ll learn the following:

Pre-Seed Funding

Pre-seed funding is the earliest funding stage. This is when the founders are first getting their operation off the ground. The most common sources of pre-seed funding are the founders, close friends, supporters, and family members.

Investors at this stage aren’t investing in exchange for equity in the company.

Seed Funding

Seed funding is the first official money that a venture raises. Some startups never make it beyond seed funding into the later stages.

This early financial support is the seed that'll help grow the business. Seed funding finances the company's first faltering steps, including product development and market research.

One of the more common types of investors participating in seed funding is angel investors. Angel investors love riskier ventures, like those without a proven track record.

Seed funding rounds vary wildly in how much capital they generate for a startup. However, it’s not uncommon for these rounds to generate anywhere from $10,000 to up to $2 million.

For some companies, a seed funding round is all they need to successfully launch.

What is a Series A?

A Series round is an investment in a privately-held startup company. This is after it has shown progress in building its business model and demonstrates the potential to generate revenue.

Less than 10% of organizations that manage to get funding for a seed round successfully raise a Series A investment.

Once a startup has a proven track record such as consistent revenue figures, an established user base, or some other key performance indicator, that company may choose to do a Series A funding round.

A Series A round allows a startup that has potential but lacks the cash to expand its operations.

The funds a startup seeks will be used for things like expanding into new markets, hiring additional personnel, and acquiring new office space. Founders might also use the funds to pay out initial seed or angel investors.

With Series A investment, a company can get up to a two-year runway to develop its products, team, and go-to-market strategy. That way, it's able to grow its business in preparation for entering the market.

Series A investors

Series A investors gain a significant or controlling interest in the startup company in exchange for their investment.  Depending on the investment amount, Series A investors will likely gain seats on the startup board. This allows them to more closely monitor the organization’s progress.

A Series A investment provides venture capitalists with the first preferred stock after the common stock issued during the seed round. Most Series A investors are looking for significant returns on their money, with 200% to 300% not uncommon.

Startups provide Series A investors with detailed information on their business model and projections for future growth. The prospective Series A investors will then perform their due diligence. This means they’ll review the business model and financial projections to see if they make sense.

They do this because startups are a high-risk venture, and many don’t make it. If they choose to invest, they’ll decide how much money to pour into the enterprise, what they'll get in return, and any other conditions they want to be included.

Investors in Series A rounds come from more traditional venture capital firms. Angel investors also invest at this stage. However, they have much less influence than they did in the seed funding stage.

It’s becoming increasingly frequent for startups to use equity crowdfunding to generate funding as part of a Series A funding round. That’s because so many companies fail to drum up interest among investors as part of a Series A funding effort.

How much money do you get in Series A funding?

While seed funding usually results in tens or hundreds of thousands of dollars, Series A financing is typically in the millions of dollars.

Usually, a company raises between $2 million and $15 million when it undergoes a Series A round. However, this number has increased because of unicorns, or high-tech industry valuations.

How much equity is given up in Series A?

Expect to give up 20 to 25% of the equity in a Series A round.

Most large venture capital firms want to own 20% of each investment. Existing investors will demand around 5%.

What do Series A investors look for?

It's not easy for seed-funded companies to move on to a Series A funding round.

In Series A funding, investors aren’t just looking for terrific ideas and healthy revenue streams. They’re also looking for organizations that combine great ideas with robust strategies for transforming them into successful businesses that generate a healthy profit.

In a Series A round, it’s crucial to have a plan for developing a business model that’ll generate significant long-term revenue. Many times, a startup has fantastic ideas that excite a battalion of enthusiastic users. In the end, these ideas aren't worth anything because the company doesn’t have a clue how to monetize the business.

How quickly is your startup growing?

Investors will need to see how quickly your startup is growing. Here's a formula you can use to calculate your monthly growth rate:

Month-to-month growth = (This month – Last month) / (Last month)

If your startup measures year-to-year or week-to-week growth, simply input the yearly or weekly number into the monthly slot. The formula then works the same.

Series A valuation: major costs

Before a round of funding commences, analysts do a valuation of the startup. Valuations are based on many factors, including proven track record, management, market size, and risk.

There's no standard methodology for calculating Series A valuations. However, if you blindly accept one, you can do a lot of damage to your startup's funding future.

If the valuation you go with is much lower than your company's actual value., you'll be giving away too much. However, if the valuation is too high, you could face the unpleasant prospect of a down round at your Series B.

That's why it's crucial to establish your company's correct valuation range, which is the market-efficient price of the round. There's often a trade-off between how much capital your startup needs and how much equity your team is willing to relinquish.

If you've been doing responsible and consistent financial planning, you'll be able to accurately predict when your startup will be ready to undergo a series A round. Talk to your seed investors to get feedback on your plans and brainstorm strategies to increase your revenue growth.

Also, your investors are likely to regularly do deals, while you might pitch them a few times a year. Learn from their expertise in the fundraising world to prepare yourself for a successful round.

Series A Valuation: Opportunities

Once the funding round has been completed, your company will usually have working capital for six months to 18 months. From there, the company might be able to move to the market. If not, it may instead progress to another series of funding.

Series A, B, and C funding rounds are all based on stages that the company goes through during its development. Make sure that as you raise your Series A, you have goals for the capital you raise. 

You need to raise enough money to help you achieve these objectives. That way, you can go on to a successful Series B.

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