VCs Understand How Series A Works. Founders Don't.

When it comes to raising for series A, there is an unfair big knowledge gap when it comes to founders and VCs, especially when it is their first time raising, that essentially this lack of knowledge put them in a disadvantaged position compared to VCs.

Let’s not forget that VCs are doing this for living. They are engaged with founders on a daily basis and have extensive experience on how to steer the wheel for series A.

How series A is different?

By this stage, it's also common for investors to take part in a somewhat more political process. It's common for a few venture capital firms to lead the pack. In fact, a single investor may serve as a lead." Once a company has secured a first investor, it may find that it's easier to attract additional investors as well. Angel investors also invest at this stage, but they tend to have much less influence in this funding round than they did in the seed funding stage.

It is increasingly common for companies to use equity crowdfunding in order to generate capital as part of a Series A funding round. Part of the reason for this is the reality that many companies, even those which have successfully generated seed funding, tend to fail to develop interest among investors as part of a Series A funding effort. Indeed, fewer than 10% of seed-funded companies will go on to raise Series A funds as well.

Let’s have a look at some stats first:

Founders on average have to meet with 30 investors to produce a single term sheet.
Founders who take pre-emptive offers take 1.4% more dilution for less money than those who run processes.
Benchmarks are almost meaningless when it comes to series A. You may be in $1M ARR or $3M ARR.

Why raising for series A becoming harder?

Here are some facts you should consider:

Series A rounds have gotten bigger and are being done later on in a company’s lifecycle.
To fill this gap and help companies in this formative early stage, seed funds have also grown bigger and more established as well.
Alongside the expansion of capital into each Series A financing, the expectations of companies looking to raise their Series As have heightened.
With a growing number of startups in many different sectors, raising a top series A has become a growing challenge.

You must know that investors are looking for a very different set of milestones before they’re willing to commit to the funds your business needs. This means you must be ready and sharp as a shark.

Typically, Series A rounds raise approximately $2 million to $15 million, but this number has increased on average due to high-tech industry valuations, or unicorns. In 2021, the median Series A funding was $10 million.

Are you ready?

In Series A funding, investors are not just looking for great ideas. Rather, they are looking for companies with great ideas as well as a strong strategy for turning that ideas into a successful, money-making business. For this reason, it's common for firms going through Series A funding rounds to be valued at up to $24 million.

The milestones for raising the series A round are very different from the seed or angel rounds. Make sure that your business is truly ready by looking for these key characteristics:

You have a valid business model that can quickly be scaled and adapted according to the changing needs of your company.
You have promising unit economics.
You have a clear-cut vision and mission.
You’re generating revenue on a smaller scale than what you can manage with the funds you’re asking for.
You know where your product fits within the current market.
You’ve started drumming up customers and have a good idea of where you need to go in order to reach more of them.
All of your legal documentation and compliance forms are in order and up to date.
You know the market and competitors better than anybody else in the world.
and the most important one, you have the team to take the company towards future rounds.

In fact, you’ll know that you’re Series A ready when a VC will open your email pitch and offer you investment as a result. You’ve achieved something that works, whether that’s an outstanding business model or a successful product, and all you need in order to take your business to the next level is funding. By ensuring that all of the other pieces are in place before you choose to write your pitch, you increase your odds of hearing a yes, and that will help push your business toward success.

Networking

When it comes to raising capital for series A, networking with investors should have started way earlier. If you just want to build your network of investors now, you will have a hard time building a network and raising at the same time. That’s why many startups fail to raise capital.

If you do not have a network of investors, we still can help you. You can leverage the network and relationships we have built over time and capitalize on it and connect to them by leveraging our platform.

Now, you’ve spent a lot of time building a network dedicated to your overall business success. Now, it’s time to leverage that network — especially the people that you’ve already built in-depth relationships with or the investors you are connected via Capitaly platform.

Securing an investment from a VC doesn’t happen overnight. Like any other relationship, you must build trust over time, showing your business to be trustworthy and capable.

Ideally, you want to meet with your potential investors as early in the process as possible in order to give them a better idea of who you are and what you’re hoping to accomplish. Just like you wouldn’t offer a loan to a “friend of a friend” you’d just met without a compelling statement of their character, you can’t expect investors to dive in and offer money the first time you meet. Instead, bring investors on board when you have a working prototype or something else you can show them, then give them an idea of your future business goals.

Story

Your story is one of the most important selling points of your business. You don’t just want to present raw facts and figures to potential VCs; instead, you want to give them a strong look at your story. Give potential VCs a look at your story.

What does your background look like — why you and your team are the dream team? What problems have you found in the world that your business has the potential to address, and how are you planning to meet that goal through your new business? How is your solution going to transform the world or the way people look at similar problems in the future?

Data room

I have seen so many messy data rooms. That’s a red flag. If you cannot set up a proper clear and structured data room, VCs cannot trust you to build a structured business.

We are building a structured standardized data room for you at Capitaly so you can leverage an organized system for a data room.

Essentially you need to show:

Any information about employees (both past and present if relevant)
Past financing information
Your corporate structure
All client and third-party contracts
Intellectual property information
Revenue, operational costs, burn rate

Product market fit

Showing product-market fit is both an art and a science.

The science comes from cohort analysis, retention curves, organic adoption, etc. This is where you can look to data to show that the market is starting to adopt your product. Being diligent about that data is critically important not just to show you have product-market fit, but also in cultivating and showing that you’re data-driven as an organization.

But the art of judging product-market fit comes from the ambient noise that surrounds your company. Buzz in the press. Glowing customer feedback and testimonials. Fanatical users. All these contribute towards the feeling that you’ve found product-market fit.

The best sign of achieving PMF is when you are forced to hire customer success managers. This means your customers are engaged with you and to be able to keep them that way, you must take a step further and have a strategy in place to grow them.

Team

A big signal to investors that you’re ready to move to the next stage is that you’ve been able to build out your team and plug gaps in the key areas where your founding team is deficient, in the form of either employees or advisors.

You want to be able to show an ability to hire and bring on talent from centers of excellence, whether it’s individuals from top universities, top companies, or just remarkable people that can benefit the critical early DNA of the company.

The investors that you want to lead your next round should recognize that top company only succeed if they are able to build out a diverse talent pool. The later you leave this task, the harder it gets. So by the time you’re raising a Series A, you should be able to demonstrate your ability to hire people that bring perspectives, qualities, and experiences beyond those of the founding team.

Attracting talent from places like these is a signal to investors that your company has some real magnetism, and that you’re able to convince people with a lot of optionalities to choose to come and work with you. When elite talent is willing to stake themselves in your company, it’s a reliable heuristic for investors. Don’t forget to highlight and showcase your hires and their backgrounds.

Pitch deck

For your seed pitch, the design and data presentation in your pitch deck isn’t always different makers. But when you’re pitching for your series A, having world-class design and data makes a difference.

Make your decks look simple and awesome. Have lots of data available in an appendix or within the deck. You want to leave an impression of your outstanding knowledge, analysis, and insight.

This guide works best in conjunction with the consulting programs and resources we’ve built out for series A startups. We can help you fill up gaps around the product, business strategy and operational efficiency via Capitaly consulting services. Our hope is that we remove information asymmetry from the Series A process, and help level the playing field between founders and VCs.