How to Prepare a Startup for Series A Funding

Series A funding is important in taking your startup to the next level, but to secure it, you’re likely going to have to meet more rigorous investor requirements and expectations. Thorough preparation and market research helps increase success rates with this funding strategy. In this post, we’ll put you on the path to success.

Understanding Series A Funding

Series A funding is the first significant round of venture capital fundraising for a startup, but it tends to be the second stage of startup financing – following the seed funding round.

Series A funding is mainly intended to help grow the startup by further developing its product or service. This may involve hiring to expand the team, investing in product development efforts and more.

Series A funding is often carried out by venture capital firms and angel investors, and the typical amount raised is anywhere between a few million and $20 million. Once a startup has secured that first investor, it’s often easier for startups to attract additional investors for Series A funding.

Setting Key Milestones for Series A Readiness

Before a startup can seek Series A funding, it must hit a few notable milestones. These milestones include:

Hitting revenue targets: These targets vary based on the business, but investors want to see revenue growth – and there’s an expectation that startups they invest in will be able to show them growth and generate revenue, especially while your startup raises money. Most startups have key performance indicators (KPIs) that they seek to hit before seeking this round of funding. Some key metrics for startups include recurring revenue, net dollar retention, churn rate, customer retention, average order value and return on ad spend.

Ensure product-market fit: The foundation of successful fundraising and a good investor pitch largely lies in ensuring a good product-market fit. Investors also often want to see growth in a startup’s customer base and momentum in the market.

Scalability: Is your startup ready to scale and reach new geographic areas? Remember, Series A funding isn’t the initial stage of funding. Investors aren’t looking to invest based on potential. They’re looking to invest based on current results and the future growth of your startup. The ability to enter new geographies and penetrate new markets is a notable draw for raising money.

Good management: Another big milestone is having the right people leading your startup. While Series A funding is designed to help with hiring, the foundation needs to be there – and it needs to be a foundation that investors believe in.

Make sure you’re tracking your startup’s performance against these milestones to determine when you’re ready to seek Series A funding. It’s best practice to plan anywhere from 6 to 9 months in advance of fundraising needs.

Financial Storytelling: Aligning Metrics with Your Vision

Metrics alone aren’t just enough to attract investors in many cases. Today, it’s important that your startup aligns its financial data with your vision to demonstrate progress and tell a compelling story to investors. Numbers are just numbers unless they support a larger story. Putting them in the context of a bigger story that describes where your startup is going, what your startup’s mission is and how your startup is currently performing helps align data and demonstrate growth.

Some KPIs to consider monitoring as you formulate this financial story may include annual recurring revenue, churn rate, customer retention, average order value and return on ad spend. Make sure you’re framing these KPIs in a way that clearly demonstrates your startup’s value and potential.

Building Strong Investor Relationships Early

Investors aren’t likely to just pop out of the woodwork to back your startup – you need to build a relationship with them. It’s part of the reason why we advise planning 6 to 9 months in advance of startup funding needs. You need time to build and nurture these relationships.

One way to begin the conversation with prospective investors is to simply meet them where they are. Attend the events that they’re at and network with them. Seek introductions through friends or mutual contacts. Remember, investors are looking to invest – it’s what they do. It’s up to you to tell a compelling story and give them a reason to invest in your startup.

Once you’ve connected with investors, be sure to continue the conversation. Keep prospective investors updated on your startup’s progress and stay transparent about how you’re performing. Building trust and demonstrating consistent progress are key.

Crafting the Perfect Pitch Deck

Pitching potential investors for Series A funding is a lot more than just having a conversation and coming to a handshake agreement. In fact, there are some essential elements that you’ll need to create a compelling pitch to secure Series A funding. These elements include:

An introduction: This is where good financial storytelling can come in handy and can help make a compelling introduction to your startup and what you’re all about.

Showing product-market fit: Series A investors are looking to invest in companies that are on the path to becoming highly successful. Demonstrating product-market fit is a big part of this.

Demonstrating growth metrics: Metrics are important on any pitch deck and in helping to tell your startup’s financial story. Remember, numbers support the story that you want to tell. Make sure you’re selecting the right ones.

Market opportunity: Align your startup’s business strategy with the needs and demands of your target market. Demonstrate the market size and growth, detail the competitive landscape and make sure you have a plan on how to reach customers.

Use of funds: Investors want to see a demonstrated efficient use of capital and growth metrics.

Other aspects of a good pitch deck include adding visuals, charts and graphs to help support the financial narrative that you’re telling. It’s also important to learn as you pitch. Make sure you’re continuously updating your pitch deck as you receive feedback from prospective or current investors to make the deck as compelling as possible.

Financial Model and Business Plan: Preparing for Investor Scrutiny

It’s in an investor’s best interest to scrutinize your startup. Asking questions and a desire to learn more shouldn’t be off-putting, it should just go to show you that investors at this stage of funding rounds are serious about the investments that they’re making and proceed carefully in many cases. Early stage startups aren’t concerned about profitability, but once you get to the Series A funding stage, profitability takes center stage.

So how can you present clear revenue projections and define a path to profitability? It starts with focusing on unit economics, like customer acquisition cost and lifetime value. Your startup should be able to prove that it can service a customer in your market in a profitable way. You need to show that you’re building a scalable startup that’s ripe for future growth should you receive the Series A funding that you’re seeking. It’s also not a bad idea to develop a clear exit strategy for your existing management team in case growth requires a more experienced team of executives.

Timing Your Series A Fundraising Effort

Seed stage financing only lasts for so long, but you don’t want to run out of funds and then start seeking Series A funding. That’s why it’s best practice to start fundraising anywhere from 6 to 9 months in advance to ensure you’re giving your startup plenty of runway before running out of funds.

Additionally, you’ll want to wait to seek Series A funding until you’re able to demonstrate product-market fit, customer traction and certain revenue metrics are established.

The fundraising process takes time. Between preparing your pitch deck and creating your financial story, networking with investors and negotiating terms with interested investors, it’s hardly an overnight process. In fact, it’s a process that can take several months.

Managing Term Sheets and Investor Negotiations

Term sheets outline the main terms and conditions of an investment or transaction – and both parties must agree to terms before anything can take place. Ideally, terms are mutually beneficial – both to the investor and the startup. But how do you know if you’re getting a good deal?

Ideally, you’ll work with enough prospective investors to negotiate multiple term sheets so you can cherry-pick between offers. It’s also a good practice to meet with investors you trust and ask them to help you refine your pitch before you go to meet with any of your top investor prospects.

Additionally, be sure that you have legal counsel on hand to help you review terms so you have a clear understanding of terms and conditions before anything becomes finalized.

Avoiding Common Mistakes in Series A Fundraising

Many startups fall victim to some Series A fundraising mishaps. Make sure you avoid these common mistakes:

• Raising funds too early before your startup can hit defined growth milestones.
• Spreading resources too thin by expanding to new markets or developing new products too soon.
• Not having well-organized or compelling data to show to potential investors during the fundraising stage.

Securing Your Series A Success

Compelling financial storytelling, good preparation and building solid investor relationships are all crucial to securing Series A funding, but it’s easier said than done to establish all of this. That’s where Graphite Financial can help. For personalized assistance in preparing for Series A funding, contact us today. Our professionals are experienced in all aspects of startup fundraising and can help you secure the funding that you need. Contact us today to schedule a free consultation.

Ready to Prepare for Series A? Partner with Graphite Financial

Contact Graphite today for more information about our financial planning and fundraising support services. As experts in financial modeling and investor relations, we’ll help you through this important stage in your startup’s lifecycle. Contact us today to get started and learn more about our options.

FAQs

What is Series A funding and how does it differ from seed funding?

Series A funding is the first significant round of venture capital financing for a startup. It follows the seed funding round.

How do I know if my startup is ready for Series A funding?

Your startup is ready for Series A when it demonstrates product-market fit, can show revenue growth and has a clear understanding of its growth strategy.

What metrics do investors look at in Series A fundraising?

Investors want to see a path to profitability. They’ll look at metrics like revenue growth, annual recurring revenue, customer acquisition cost, return on ad spend, churn rate and customer retention, among other variables.

How long does the Series A fundraising process take?

Series A fundraising may take anywhere from a few months to a few years depending on the size of the capital to raise and other variables.

How can I build relationships with investors before raising Series A?

Networking with investors by attending events where they’re at is important. Also, be sure to seek investors through any connections that you have, whether it’s a personal relationship or connection to a venture capital firm.

What should I include in my Series A pitch deck?

There are some essential elements that you’ll need to create a compelling pitch to secure Series A funding: an introduction, demonstration of product-market fit, growth metrics, market opportunity analysis and use of funds.