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Seed Funding vs. Series A: 5 Key Differences To Understand

Monday, February 28th 2022 (3 months ago)

What are the key differences between seed funding vs Series A? Raising capital is always a complex job, and each stage of financing brings its unique challenges and opportunities.

This post explains how seed funding differs from Series A funding so you can prepare for either round appropriately.

Table of Contents

The Startup Funding Process

The typical funding process for startups is a series of consecutive funding rounds.

At each stage, more investors buy into the company, or the existing investors increase their investment in return for more equity.

Venture capital firms are the most common source of capital. VCs can invest large sums of money and they have plenty of experience investing in high-growth companies.

But there are plenty of other options, and the number of alternatives is growing rapidly as technology enables more community-based investment platforms.

To kick things off, let’s overview the typical stages of the startup finance lifecycle.

Illustration: Man looking through a telescope

An Overview of the Funding Rounds

Seed Funding

Some startups secure their initial funding from friends and family in a pre-seed round. But the seed round is typically the first big investment an early-stage startup receives after it has demonstrated that its ideas are valid and viable.

How does it work? It’s pretty simple. The investor gives money to the startup in exchange for shares of equity. 

Angel investors are a common source of funding for startups in the seed stage. Angels are typically wealthy individuals who are willing to take risks to reap big rewards.

Seed-funded companies tend to be small and the money raised in a seed round is often used to enable an aggressive hiring plan, allowing the company to grow rapidly.

This is often the most challenging round for an entrepreneur because their company might not have a proven track record yet.

Series A Funding

This is the first major round of financing. Companies typically seek a Series A after they’ve established a track record and demonstrated product-market fit in their vertical.

Series A investors are not just looking for great ideas. They’re looking for great leaders and great teams with well-defined strategies and go-to-market plans.

Angel investors do get involved in Series A funding rounds, but venture capital firms are the biggest player at this stage.

Establishing baseline metrics and demonstrating the growth trajectory of the business are common challenges for founders raising their Series A.

Series B Funding

The Series B round is all about scaling. At this stage, a startup has successfully proven that their product or service is desirable and competitive and that their organization is capable of delivering it at a larger scale.

Sometimes the same investors who funded a Series A will choose to get involved in a company’s Series B. But there are also plenty of VC firms that specialize in later-stage investments.

Funds from a Series B are sometimes used to scale up sales, marketing, and support operations and to hire aggressively for the anticipated growth.

Series C Funding

At the Series C stage, a company has achieved some measure of success. Businesses raise Series C rounds for new product development, acquisitions, and to enter new markets.

Some of the venture capital firms from the previous rounds may take part, but they are often joined by larger players like hedge funds, private equity groups, and investment banks.

A Series C round is often considered an exit point for the founders, after which they plan to sell the business or go public. In some cases, however, a business may require additional funding rounds before its IPO or acquisition.

Illustration: Seed investment portrayed as a money tree

Seed Funding Round: In-Depth

A seed round happens early in the development of a startup, sometimes when the business is still only an idea. As you might expect, there are relatively few investors who are willing to accept this level of risk.

A startup seeking seed funding will need to present a crystal clear vision that shows their understanding of the competitive landscape, and how they will position themselves within it.

Investors will want to see detailed plans that account for different scenarios. They will want to see that you understand your environmental risks and that you have plans in place to respond.

Building trust with investors is critical at this stage. Seed startups usually don’t have many real-world accomplishments to boast about, and investors need to believe that the founders and their team are committed, focused, and capable of building a successful organization.

Who Are Seed Investors?

Seed funding is most often secured through angel investors, but several other players can be involved.

Some incubators and accelerators offer funding programs for their participants. Sometimes venture capital firms get involved in seed rounds for startups that match a specific target profile. And many seed rounds have been closed with family, friends, and the founders themselves as the only investors.

One benefit of incubators and accelerators is that when they provide seed funding to a startup, they usually provide mentoring and coaching to help the founders make good decisions with the money.

There’s a growing trend in startup finance towards equity crowdfunding, or raising a community round. Platforms like Wefunder and AngelList have opened the door for smaller investors to get a share of bigger deals, and they’re proving to be a very attractive option for many founders.

How Does the Seed Funding Process Work?

Preparation for a seed round typically involves internal due diligence to update key metrics and milestones, preparation of a financial model, and creation of a pitch deck.

When preparation is complete, the next step is locating and connecting with investors.

When an investor is interested, they will enter a due diligence period when they will often want to spend some time reviewing the company’s financial model, interviewing key stakeholders, and researching the market. If the investor is still interested after their due diligence, negotiations begin.

When a startup receives seed funding, it should work with counsel to provide a formal agreement and a terms sheet to the investor.

These documents will include the size of the investment, details about the securities issued in return, and the terms of repayment, which could be repaying the investment or converting it to shares of equity.

These documents should be available for all parties to access at any time.

In some cases, seed funding is provided in the form of convertible debt. When a startup accepts this type of financing, it will need to make interest payments (often in the form of equity at the time of the next fundraise) on top of the principal amount.

How Long Does It Take to Raise a Seed Round?

A seed round can take place any time, but the typical startup seeks a seed investment anywhere from six to twelve months after founding. A realistic timeline for a founder’s first seed round might look something like this:

  • Month 1-2: Preparation
  • Month 3-4: Pitching
  • Month 5: Due Diligence
  • Month 6: Negotiation & Closing

The bottom line: If you have less than 6 months of runway and this is your first time doing this, you should get started yesterday!

Illustration: Series A

Series A Funding Round: In-Depth

A startup seeking a Series A typically has a track record to prove that its business is viable and competitive. It probably has some metrics and milestones that demonstrate product-market fit. It may or may not be generating revenue.

Even if your company has revenue coming in, investors will need to see proof that you can grow that revenue. You should be able to show them detailed projections for every revenue stream based on your actual data and industry benchmarks.

You can impress investors at this stage by modeling and sharing different scenarios that account for environmental risks and your plans for responding to likely scenarios.

Who Are Series A Investors?

Individual angels are less common in Series A rounds, with some exceptions. Angel syndicates and crowdfunding platforms are more likely to be involved.

While there are plenty of exceptions, traditional VC firms are still the most active participants in Series A rounds today.

How Does the Series A Fundraising Process Work?

Raising a Series A is similar to raising a seed round. The biggest difference for founders will be the degree of preparation that’s required.

Series A investors will want to see evidence of traction. They’ll want to see your actual financial data, especially around the metrics that are most important for your industry and business model.

Even if you got away with an informal agreement during your seed round, your Series A will involve lawyers and a legal contract with detailed terms and conditions.

How Long Does It Take to Raise a Series A?

Six months is a good estimate for a Series A. As with your seed round, you’ll want to plan to make sure you have plenty of runway to keep your company afloat during the potentially lengthy process.

  • Month 1-2: Preparation
  • Month 3-4: Pitching
  • Month 5: Due Diligence
  • Month 6: Negotiation & Closing

A good practice is to start preparing for your Series A as soon as you close your seed round, and start preparing for your Series B as soon as you close your Series A. A good financial model gives you great insight into your runway so you can always start fundraising when the time is right.

Key Differences Between Seed Funding vs. Series A

Seed rounds and Series A rounds have a lot in common. But there are a few key differences, and understanding them can help make sure you close your rounds successfully and efficiently.

  1. Seed rounds are more likely to involve angel investors while Series A typically involve more professional investors.
  2. Seed investors are aware of the high likelihood that they won’t be getting this money back, and they will expect their equity to reflect that risk. Series A investors expect that they will get their investment back, with additional returns over time.
  3. Seed investors typically provide funding without gaining any voting rights. Series A investors usually get voting rights, although the founders usually retain primary control over the company’s direction.
  4. Series A investors are much more likely than seed investors to take a seat on the company’s board of directors.
  5. Average seed funding rounds fall between $500K to $1M. Series A rounds range from about $3M up to hundreds of millions, with an average of about $13M.

Conclusion

Whether you’re raising a seed round for research and development or a Series A to start hiring your dream team, you need to plan for the process to take about 6 months.

The process includes a lot of back and forth, and even if you nail your preparation you can still be delayed for months by due diligence and legal negotiations.At any stage of the finance lifecycle, a great financial model is one of the important tools you can have as a founder. It gives you valuable insight into the length of your runway, and it gives investors a clear understanding of your accomplishments to date and your potential for growth in the future.

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