10/12/2021

What is Series A Funding?

Series A rounds of funding are often seen as a key stage in the progress of a startup. In this post we go into detail about what is Series A Funding and what you need to know about it.

Tim Wu
Tim Wu

Head of Growth

Table of Contents

Many entrepreneurs eventually reach the point where they must think about funding for their startup, and have to ask themselves “What’s the difference between Series A funding and a seed round?” Essentially, the difference is that Series A funding has more potential to grow and generate revenue than a seed round does. Series A will usually be given to startups that have proven that their product or service has a market need and potential for growth. On the flip side, a seed round of funding is typically the first round of financing for a startup company and it usually provides capital to cover the early costs of developing a business idea or bringing a product or service to market.

What is a seed round?

A seed round is funding from angel investors or venture capital funds where the money is provided upfront. Your team and advisors, who may also be participating as equity investors, are responsible for seeking this funding from sources such as friends or angel investors. Once you receive seed funding, the advantage is that you can structure your business so that there's enough cash to kick off development without fully relying on equity investors.

A seed round is generally less expensive than a Series A round. It is used by companies willing to work with lower valuations, typically those that are operating on a shoestring budget and need cash quickly. A seed round is capitalized for six months at most. After a seed round, a company can be valued based on growth, revenue, operational metrics, personnel, and credibility. A Series A round is where a company can expect the bulk of its funding to come from.

What is Series A funding?

This type of funding refers to the first investments by venture capital investors. At this stage, the startup is in a new category or at an important time in its life, and the investor feels it is important to become a part of the company. 

Series A rounds of funding are often seen as a key stage in the progress of a startup. Series A investors are typically more interested in the growth potential of a company than those from earlier rounds.

By the time your startup seeks investment from groups such as Greylock and Benchmark Capital, it is operational with a product and some clients. Investors like these expect you to be making money with your business model now. It is no longer enough to have an idea that looks good on paper — you need to be drawing in actual customers and making money with your current business model.

The typical size of a Series A round ranges from $1 million to $5 million, with typical valuations of $10-25 million. However, the investment amount and valuation are not set in stone. If the investor is confident in the entrepreneur's idea, they might offer more capital upfront or give them a higher valuation.

When to use a seed round funding

The seed round is a financing method used by startups in the early stages of the company. In other words, a seed round is one of the earliest stages of venture financing that usually takes place before the inception of a startup. This round aims to provide funding to allow founders to build products, perform market research, and gather feedback from customers. A seed round can also be described as an early-stage investment or initial capital infusion into a company or project.

It can be used by most startup companies in the pre-seed stage when the founders need to rapidly secure capital. A small seed round is typically around $200,000-$500,000, not including other startup expenses like legal, accounting, and office space. In order to get the right amount of capital, most entrepreneurs are typically selective about the types of investors they choose.

The very best investors will often offer you a "seed package" which includes a substantial portion of their funding in exchange for convertible notes or stock options. Most seed round investments are less about the money and more about the opportunity to help your startup become a much larger company with high-paying customers.

A seed round of funding is unnecessary if the startup has access to other resources such as customer revenue, grants, or loans. But when none of these are available, you should probably consider seed funding rounds. The seed round allows startups to test their business model before raising larger sums of money. A good idea will generate interest from potential investors, which may lead to further rounds of funding.

When to use Series A funding

When it comes to startup funding, companies have a few options. They can use their own capital, use friends and family's money, or borrow from banks or credit lines. But if your startup is getting closer to the growth stage and needs more money to scale, the best option is Series A funding. It's a round of financing that provides an early-stage company with capital to continue operations without needing any additional outside financing for at least two years. 

Series A investors are typically high-net-worth individuals with strong connections in the industry looking for high potential returns on investment. As such, companies seeking Series A funding need to be very close to profitability or even already be profitable before this type of funding. In exchange for their investment, Series A investors receive preferred stock, which offer higher dividends than the common stock typically given to seed investors.

Series A funding rounds are used to expand and scale a business and include hiring key employees, buying equipment, and increasing marketing efforts. Investors look for entrepreneurs who have a proven track record and can show that they have gathered some form of traction before giving them the first round of investment.

You can apply for seed round funding as soon as your idea is fully fleshed out. On the other hand, Series A financing comes from venture capital firms and large corporations and only goes to startups that have proven their potential in the market.

 

 

Benefits of seed round funding

  • Seed funding will finance your company while you're still in the startup stage
  • Ease of planning; your funds will be focused on building the product and getting it in front of customers
  • You can pitch your product to investors and potential customers
  • You can retain full ownership of the company
  • You get to prove your value
  • It allows you to avoid diluting your ownership stake
  • You can expect the following from a seed round:
  • A large amount of money ($200,000 to $500,000+)
  • A regular monthly investment of $10,000 to $50,000+

As mentioned above, seed round funds are smaller than Series A investments, but it's an opportunity to get your foot in the door with investors. You can get this down payment, including business development, marketing, and branding costs, all while having some skin in the game.

 

Benefits of Series A funding

  • Series A is the most prestigious round of funding in the venture capital and angel investment world
  • You get early access to the right teams, resources, and systems that can guarantee your long-term success
  • More money; Series A funding brings in investments to the tune of millions
  • Investors are hungry to get a slice of your company's next-generation growth
  • Long term viability; Series A funding allows inventions that have great potential to acquire the necessary resources for long term expansion
  • Less risk; Series A investors get a larger stock in the company they are financing, effectively lessening the risk that startup founders have to carry

Growth. Series A funding offers flexibility to grow. From common experience, seed rounds may be too restrictive, often forcing companies to stick with a small user-base or beta-stage product and possibly limiting their customer reach. The Series A route allows a company more time to grow and flourish while still having an "exit" event, with the Series A round being the one to bet on and support as the company grows.

 

 

What to choose 

Both seed rounds and Series A funding are sought after because they can provide a quick cash infusion to get the ball rolling. That said, Series A funding tends to be the most lucrative funding option of the two. 

Seed round funding is typically funded with little to no investors in the round, so the idea is that you'll be the one footing the bill with the help of friends, family, and investors that are willing to be patient while you focus on product development and your market strategy. Series A funding, on the other hand, tends to be more lucrative. 

Conclusion

There is no one-size-fits-all strategy for raising a successful round of fundraising. Different startups are going to require different amounts and types of capital. Also, the venture capital market has changed over the years, which means your decisions will be affected by economic trends and changes in a company's business needs. 

Seed round and Series A funding are just two of the many avenues that founders have to raise money for their companies. At a very basic level, raising funding is a numbers game. To successfully raise capital, you will need to start with at least 25 investors and seek at least 25 more investors. The more money you have to work with, the better you can present your plan to investors and negotiate terms with them.


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