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Series A Funding Guide for Founders: How To Lock In the Big Round

Wednesday, March 30th 2022 (about 2 months ago)

No moment is more critical in the growth of an early-stage startup than when the founders roll up their sleeves and begin the process of raising their Series A funding.

At the Series A stage, an idea that started as a rough sketch on a whiteboard or a cocktail napkin has finally been brought to life in the real world. Customers are paying good money to get it, and the founders are ready to flip the switch and start scaling the operation.

This can be a demanding and stressful time for you as a founder, especially if this is your first Series A raise. It’s a cumbersome process that places high demands on your time and attention. If your expectations aren’t set correctly going in, you can run into problems around scheduling, documentation, and more.

This post guides you through the entire process, from drafting your tear sheet to signing your term sheet. We give you some pointers about how long you should expect each step in the process to take, along with tips to execute each step efficiently. Finally, we share the most common stumbling blocks we’ve seen other founders struggle with while raising Series A funding.

There’s a lot of information to soak up here, so bookmark this page and keep it as a reference for the next few months. We know it feels like everything is happening very quickly right now, but you’re just at the beginning of a process that might last 6 months or more.

Illustration: Series A funding

Table of Contents

What’s New in Series A Funding

Whether this is your first time out or you’re an old pro, you’ll want to brush up on the basic lay of the land first. A lot has changed over the past few years, and there are some things you should be aware of.

There can be harsh consequences if you rush in headlong without doing your research. Keep in mind, this isn’t just about cashing a check. The valuation and terms you receive now can have lasting implications for your startup down the road.

There are a few things you should take into consideration:

The Size of the Average Series A Round Has Increased

There’s been an upward shift in the size of recent Series A rounds. The average seed round is still hovering right around $2 million, but the size of the average Series A round has swelled in recent years, up to more than $12 million.

This increase has been partially driven by outliers, as a few giant deals in the biotech and future tech verticals have pushed the average up. Valuations for startups in other verticals have climbed as well, although the gains have been more modest.

Overall, investors do seem to be favoring big deals. What do we mean by “big” deals? Consider these recent stories:

  • GitHub: Github’s $100 million Series A round in 2012 was led by a16z, and at the time it was the largest check they’d ever written. And it worked out. GitHub went on to be acquired by Microsoft six years later for $7.5 billion.
  • Transmit Security: The internet security startup that promises to build passwordless authentication attracted $543 million in Series A funding in 2021.

Chances are slim that your Series A will break 9 digits. But not every huge company starts with a huge Series A. Take Uber as an example:

  • Uber: Uber raised a relatively modest Series A at $11 million in 2011. However, today, Uber has raised more than $25 billion over more than 30 rounds of funding.

So what kind of valuation should you expect for your startup? You’ll need to research comparable companies who have recently raised a Series A and size yourself up against them. 

At the end of the day, the valuation in your term sheet will probably be designated by your lead investor. But you should have a realistic estimate in mind going in.

Series A Investors Will Expect to See Your Metrics

The days of raising a Series A with nothing but a great pitch deck are behind us. Today, VCs will expect you to show metrics that demonstrate product-market fit, an efficient sales cycle, and traction in your marketplace.

Your metrics will be measured against industry averages and comparable companies at the same stage. You need to have your books in order, and you would be wise to come to the table with a fully operational financial model.

The best metrics for you to use will depend partially on your business model and your competitive landscape. Some metrics may be specifically requested by your investors. Prepare your metrics before you pitch and prepare a narrative that addresses any inconsistencies between your numbers and the investor’s expectations.

There Are Some New Fundraising Alternatives

VCs are still the biggest player in the Series A game by far, but they do have some company these days. Several new alternatives have become available, and some previously marginal strategies have become mainstream.

  • Equity Crowdfunding – New regulations have opened up the legality, and attractiveness, of crowdfunding. What used to be seen as a questionable fundraising move is now endorsed by several top-tier VCs. Many startups are electing to run equity crowdfunding rounds alongside their traditional VC rounds. This tactic allows you to build engagement and exclusivity among your community of customers and partners.
  • Angel Syndicates – New platforms allow angel investors to band together to get involved in larger rounds where an individual angel couldn’t previously play.
  • Revenue-Based Financing – Revenue-based financing isn’t a substitute for a traditional Series A, but it provides an alternative for founders who need to raise capital but don’t want to commit to a Series A. In a nutshell, you document your revenue and receive a lump sum advance payment equivalent to your projected revenue for a period – often one year. You then repay that amount, plus a fee, in regular installments over an agreed period.

How Does the Process Work?

So you’re all caught up on the most recent developments in Series A funding, and you understand why it’s a critical point in time for your startup. But as a founder, how do you approach the process and get the wheels turning to start raising your Series A?

As we discussed above, you’ll need to be able to document and demonstrate product-market fit and traction. But that’s not all. There’s going to be a lot of documentation during this process.

Your investors will want to see details about your team, your go-to-market strategy, your existing and planned partnerships, and much more. You need to document every scrap of evidence that proves your business is likely to succeed.

From the moment when you start preparing your documentation until the moment when you sign your term sheet, this process can take 6 months or more. This is going to take a team effort, so set expectations up front that this will be your number one priority, and make sure any supporting tasks that are delegated to your team are treated as high priorities as well.

Here’s a rough outline of the process. We’ll discuss each of these steps in detail below.

Your process may differ significantly, but this high-level timeline should set reasonable expectations for everyone involved.

Step #1: Preparation

The Series A fundraising process is front-loaded, and the majority of the heavy lifting will take place during the preparation phase.

If you’re raising a Series A, you probably already have revenue coming in. You’ll need to thoroughly document your revenue streams in a way that shows them to be repeatable and scalable. 

If your accounting books need some attention, get on top of that now. You’ll need clean, reliable, and consistent data throughout this process, so it’s best to tackle this first and establish a reliable foundation from which to build the rest of your fundraising assets.

When your accounting data is ready for prime time, you’re ready to start building the other components you’ll need to get ready for pitching. We recommend you focus on these five key assets:

  1. Tear Sheet: A tear sheet is a brief document (one or two pages) with high-level information about your company: your idea, your team, and your basic data. Your tear sheet should act as a teaser for your pitch deck, which will expand on each element and provide additional details. Don’t give them everything they need to know in the tear sheet. Ideally, they’ll be left with some questions that make them want to hear your full pitch.
  2. Pitch Deck: You probably already know what a pitch deck is, but you might not have built one yourself. If this is your first time pitching, you’ll be amazed at how much effort and scrutiny go into this one small document. Your pitch deck needs to be beautifully designed, it needs to tell a simple and compelling story, and it needs to demonstrate all of the success and traction your startup has achieved up to this point. After seeing your pitch deck, investors should know exactly who you are, what you’re doing, and why you are an attractive investment opportunity. If your pitch deck is successful, investors will ask a lot of questions and start digging into the details. If that happens, you’re ready to share your financial model.
  3. Financial Model: This is the element serious investors will want to see. Do you have strategies in place for sustainable growth? Are you tracking the right metrics, and how do they compare against industry benchmarks – now and in the future? Is your hiring plan well-constructed and in agreement with your cash flow projections? Your financial model answers all of these questions, and many more. By examining the assumptions and calculations in your financial model, an investor can get a great sense of your company’s performance and your capabilities as a leader. A great financial model makes a stronger impression on investors than any other fundraising asset.
  4. Cap Table: Your cap table shows who owns what shares of your business, and how the ownership of equity will change over time. A cap table charts all of your company’s securities, and who owns them. By reading your cap table, an investor can understand who owns what percentage of your business, which allows them to see how they will fit into the big picture if they make the investment you’re asking for. Your cap table should be clear and easy to understand at a glance.
  5. Data Room: As you pitch to more investors, the number of follow-up questions you need to respond to grows quickly, and the required communication can become overwhelming. A great way to address this proactively is to create a digital data room where all the necessary data and documents an investor will want to see are neatly organized in a single place. Any cloud-based shared storage utility – like Google Drive or Dropbox – will work fine. A well-structured data room makes your communication much more manageable throughout the fundraising process.

Step #2: Pitching

When you have all of your assets ready to go, you’re ready to start pitching. This is the meat and potatoes of Series A fundraising for founders.

For some founders, pitching comes naturally. For others, the idea of standing up in front of a room full of venture capitalists is a waking nightmare. Wherever you fall on this spectrum, practice is your best ally.

VCs won’t fault you for being a little nervous when you’re getting started. And they won’t invest just because you’re great at public speaking. What they’re looking for is your mastery of the strategies and concepts you’re presenting in your pitch deck and your financial model.

They want to see that you have a realistic and comprehensive understanding of your marketplace and your competitive landscape, and your startup’s current positioning within those settings.

Practice your pitch with your team, your mentors and advisors, and even your friends and family. The more practice you have, the better. Each practice pitch can expose problems in your data, holes in your logic, and questions that you’re not prepared for.

When you start feeling like you can confidently respond to any tough question that’s thrown your way, you’re ready for the show.

There are tasks and deliverables you need to prepare for, beyond just booking appointments and showing up to pitch. Here’s a quick overview of some other things you should be doing while you’re fundraising:

  • Build an Investor Pipeline: You or someone on your team should start researching potential investors and identifying the candidates who are most likely to invest in a venture like yours. Look for investors who are active in your vertical and/or your geographic area. Work your network thoroughly to unearth any warm introductions that may be available. Cultivating your investor pipeline ensures that you spend your time pitching as efficiently as possible.
  • Fine Tune Your Assets: Before you started pitching, you prepared a beautiful tear sheet, a killer pitch deck, and a bulletproof financial model. As those assets start to see the light of day in conference rooms around the country, you’ll receive feedback and advice from investors about how they could be better. Establish a continuous improvement loop to incorporate that feedback into your original assets, and your pitch will start to get stronger every time you give it.
  • Never Stop Practicing: We’ve already stressed the importance of practicing before you pitch, but it’s also something you should continue to do after you start getting real feedback. If there are problematic points in your presentation that consistently don’t go well, drill them. Find someone with fundraising experience, and ask them to work through those points with you until you start to find a better flow. If the problem isn’t your presentation skills, then you may need to update your assets as discussed above. Repeated practice runs will flush out the problem points and help you hone in on the perfect narrative.
  • Tailor Your Presentation to Your Audience: When you’re pitching VCs, you’ll want to focus on financials – especially your financial model. VCs aren’t always swept up by a great narrative. They’re going to dig into the nuts and bolts of your proposition, and you should set them up with all the details they want. If you’re pitching your community, the narrative becomes much more important. A middle-of-the-road approach might be best for angels and angel syndicates. Know your audience and tell a story that fits their interests.
  • Get Ready To Travel: Even though VCs have recently warmed up to the idea of pitching via teleconference, travel is still an important part of the fundraising process. Some VCs will want to meet face to face, and if you’re getting good traction during your raise, you might find yourself taking back-to-back trips across the country. All this happens at a time when your bandwidth is already stretched by communication and negotiation. Set yourself up for success by getting your travel gear organized and taking good care of yourself during this stressful time.
  • Create Buzz: When you’re fundraising, you want to take advantage of every opportunity to create buzz and get the word out. One well-placed message might generate some interest from an investor who wouldn’t otherwise have learned about your round. Promote your raise on social media, and include it in content throughout any existing marketing campaigns and newsletters. You can also distribute a press release on any public wire service, or handle a PR firm to handle it for you.

Step #3: Due Diligence

After you have your investors lined up, the next step is due diligence. Due diligence is the process by which your investors confirm that the realities of your operation match the story you told them in your tear sheet, pitch deck, and financial model.

The due diligence process varies for different investors and different deals, but it will typically involve the investor digging into your accounting books, interviewing your staff and stakeholders, and looking for conflicts and issues regarding your intellectual property, legal agreements, and pre-existing securities.

To prepare, you should consolidate and organize all of your documentation for the following areas:

  • All corporate documents including your Certificate of Incorporation, Charter, and Bylaws
  • Board documents including member profiles and meeting minutes
  • Business plan, accounting books, and financial model
  • Trademarks, patents, copyrights, and any other intellectual property documents
  • Cap table, and any documentation detailing securities issued by the company
  • Obligations and agreements including mortgages, leases, and loans
  • Legal filings involving the company or its principals
  • Partnership agreements and joint ventures
  • Human resource documents including employment contacts, non-disclosure agreements, and benefit plans
  • References and endorsements from major clients and partners
  • Technical documentation like schemas, diagrams, sitemaps, interface designs, etc.

Keep in mind that due diligence should be a two-way street. This is your opportunity to look into your investors’ backgrounds to verify that the way they conduct business is consistent with what you have been told.

Research your investors, see what other companies they’ve invested in, and what sort of issues those companies have faced. Check for any legal proceedings the investors have been involved in and follow up on anything that concerns you.

You should also ask for a few references to check that are similar to your company in size, stage, location, or industry vertical. Call the references and talk to the founders about what their experience has been like working with the investor.

Due diligence is about the investor making sure they feel confident providing the capital you need, and also about you making sure you feel confident taking it.

Step #4: Closing

When you close your Series A funding, the process will include valuation, term sheets, negotiations, legal reviews, and sometimes a formal closing.

At this point, you’ll be several months into fundraising, and you might be feeling like the process will never end, but you need to tough it out for a few more weeks. You’ve made it through the hardest parts already and now you’re close to the finish line.

While your valuation will ultimately be decided by the investors, they will probably involve you in the process. If they do, you need to have a realistic valuation in mind for your company. There are several methods you can use to generate a ballpark estimate for your startup’s value.

When your valuation is complete, you’ll receive a term sheet. Have your lawyer review the term sheet and confirm that everything is consistent with your expectations. Verify that the funds will be provided in a manner and on a schedule that supports your plans.

It’s normal for founders to negotiate the terms of their Series A funding, so don’t feel like you’re stuck with all of the details in the initial terms sheet. You can go back to the investor and ask for changes as needed. Keep your lawyer informed and involved throughout the negotiation process.

Depending on the investor’s preferences, the formal closing may consist of you signing the agreement remotely and delivering it through the mail; it could be an onsite meeting where all parties sign together, or it could be an electronic signature and a teleconference.

And that’s it. When all the papers have been signed, it’s time to pop open the champagne and celebrate!

A Typical Timeline for Series A Funding

If this is your first Series A, this information might be a bit overwhelming. But you must have realistic expectations and acknowledge the amount of time this process is going to take.

Failing to plan a realistic timeline can mean the difference between a successful Series A and a failed startup. Plan and manage your runway to avoid running out of cash before the Series A funding arrives in your account.

As we mentioned above, a rough timeline for planning might look something like this:

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

There are plenty of things you can do to speed this process up. Here are some recommendations for tasks you can run ahead of time, or in tandem with other tasks, to accelerate the process and close your Series A as quickly as possible:

  • 6 to 12 months before fundraising: Clean and standardize your accounting data, begin crafting your fundraising narrative, start building your investor pipeline, and start reaching out to some investors to gauge interest and get feedback.
  • 6 months before fundraising: Build your financial model. If you already have one, bring it completely up to date and update your assumptions to reflect your current growth rates. Build a post-raise hiring plan. Clean up your cap table. Begin building your data room and preparing due diligence materials.
  • 2 months before fundraising: Set your fundraising target and your valuation estimate. Create a backup plan to detail the actions you will take if you fail to meet your fundraising goals.
  • 1 month before fundraising: Choose a member from your team to pitch (most often the CEO), and start workshopping your fundraising assets with your most experienced mentors and advisors.
  • 2 weeks before fundraising: Delegate all other responsibilities away from the person who will be pitching. 

Common Series A Stumbling Blocks

We’ve helped a lot of startups successfully close their Series A funding. Along the way, we’ve noticed a handful of mistakes that many founders struggle with during the process.

Read through the list below, and try to anticipate if any of these could pose a problem for you. Be proactive about handling these issues before you begin raising your round – sidestepping these problems can save a significant amount of time in the overall process.

#1: Not Knowing Which Metrics and Milestones to Share

As we mentioned above, Series A investors will expect you to share relevant performance metrics that allow them to gauge your performance against comparable companies, and the industry as a whole.

If you show the wrong metrics in your presentation, investors might infer that you don’t know how you stack up against other companies in your space.

The right metrics for you to use will depend on your business model and your unique business concept. These five key metrics serve as a starting point. These, or some variation of these, should likely be included for your startup:

  • #1: Run-Rate Total Revenue
    Total revenue in period ✕ # of periods in one year
  • #2: Revenue Growth
    (Current period revenue ﹣ Previous period revenue) ∕ Previous period revenue ✕ 100
  • #3: Gross Margin Percentage
    (Total revenue ﹣ Cost of goods sold) / Total revenue ✕ 100
  • #4: LTV:CAC
    (Customer lifetime value) : (Average customer acquisition cost)
  • #5: Gross Churn
    (Cancelled MRR + Downgraded / MRR at the end of the previous month) ✕ 100

#2: Insufficient Data

Some early-stage startups haven’t done a great job of collecting and tracking their data around finances, sales and revenue, and customer loyalty.

Investors are going to want to see this data. They’ll need data to gauge how big the market is for your product, how your sales team is performing, how quickly you’re likely to grow, how much money you need to operate, and much more.

Unfortunately, there aren’t any shortcuts here. If you don’t have sufficient data, you should get started on building out your historical numbers right away. Gather what you do have, and start filling in the blanks by combing through your records.

If you don’t have the bandwidth on your team to handle this, you can hire an accounting services firm to build out the historical data for you.

#3: Incorrect Expectations About Valuation

Valuation can be tricky, especially for early-stage startups. It’s easy to overestimate or underestimate your value, and there can be some harsh consequences for doing either.

Ultimately, your valuation will be determined by your lead investor. But it’s still important for you to have realistic expectations to avoid making a bad impression or running into trouble during negotiations.

For a realistic estimate, use one or more of these valuation strategies. Let the VC drive any valuation discussions, and try to get their perspective before you share any numbers of your own.

#4: Failing to Demonstrate Product-Market Fit

Series A investors aren’t always impressed with great ideas and novel products. They’re far more interested in seeing data that demonstrates real market demand for your product or service.

In short, they want to see that people are buying what you’re selling.

By all means, you should explain what your product does, what problem it solves, who will use it, and why it’s better than the competition. But you also need to show hard data that proves your target market is interested in becoming and remaining customers of your business.

#5: Failing to Demonstrate Traction

You should be able to demonstrate traction in your marketplace. If you have strong sales and retention data, you’re there. If you don’t have that, you’ll want to find some other way to demonstrate the traction you’ve achieved so far.

Partnerships with other companies are a great way to show traction. Significant or numerous partnerships will impress inventors and validate the potential of your startup.

If you have modest traction to show, a financial model can be used to accentuate it by extrapolating your performance over time, showing how your traction will grow in the future. Always start with your real data, and avoid using unrealistic growth assumptions to inflate your projections. False data and overly-optimistic assumptions are red flags for investors.

#6: Not Having a Hiring Plan

To deliver on your promise, you’re going to need a team. This is likely one of the biggest reasons why you’re raising a Series A.

Investors want to see that you’ve given appropriate thought to planning and prioritizing the positions you will hire. You should have a plan that includes all the roles you intend to hire, your schedule for hiring them, and how you will recruit key positions.

A good financial model goes a step further and shows how each hire will impact your bottom line. You can use sales hires to inform your projected deals, marketing hires to inform your projected leads, etc. This level of detail allows you to plan your hiring with precision.

Getting Help With Your Series A

If you’ve read through this guide, you’re in a good position to successfully raise your Series A funding. However, if this is your first attempt, you’ll probably still need some help along the way.

We’ll leave you with some tips about getting help:

  • Build a robust investor pipeline. If you don’t have the bandwidth on your team to gather a large pool of potential investors, consider paying a contractor to do this for you. The more investors you pitch, the more likely you are to find the right match.
  • Get a great financial model. No other tool can support you in the fundraising process as well as a solid financial model. Forecastr gives you a convenient online interface, and many features you won’t find in a spreadsheet model. Our analysts work alongside you to build a great financial model, and to help you get the most out of it.
  • Polish your financial data. If your historical data is in bad shape, consider hiring an accounting services firm to fill in the blanks and build out your financial documents. You’ll need solid data to close your round.
  • Join a community. If your raise falls flat, start looking at accelerators and incubators. These programs provide mentoring and coaching to help you succeed, and many of them will provide access to funding to keep you afloat while you work out the kinks in your approach.

With these resources in your corner, you’re set up for success. Break a leg!

If you’re ready to build a great financial model to help you impress investors and lock in your funding, reach out to Forecastr now.

If this guide helps you close your Series A funding, reach out and let us know. And if you have any questions that aren’t answered here, you can always feel free to contact us directly.

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