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What Is Series A Funding? A Simple, Plain-English Explanation

Saturday, March 26th 2022 (about 2 months ago)

If you’re reading this, it’s probably because you asked the question, “What is a Series A?” 

Maybe you have a friend or a family member who has been talking about their Series A. Or maybe you’re just a curious person. Either way, we’ve put together a simple and straightforward explanation just for you. Read this post, and you’ll know everything you need to know about Series A funding.

Illustration: Series A funding explained

Table of Contents

Series A Funding in a Nutshell

If you’ve ever known anyone who started a company you know that it’s a tough thing to do. It takes a lot of effort and no matter how hard you work, money is always a challenge.

Some businesses only make a little money at first, and they need more money to grow. Some businesses don’t make any money at first, and they need more money to survive until they start making money.

For one reason or another, most startups need money, and there are a few ways they can get it.

Some businesses can get the money they need from the bank through a traditional loan.

Another common way that businesses get money is to take it from investors, who get a share of the company’s ownership in exchange. When a business takes investment money like this, they typically take it in stages, and one of those stages is the Series A stage.

Series A is a very important stage in the development of a growing startup. If you know someone who is working on their Series A, you probably know this is a really big deal for them.

Keep reading, and we’ll explain why it’s a big deal. But before we can do that, we need to do a quick overview of the stages of startup investment.

Illustration: Founder thinking about money

How Startups Get Money

Startups get investment money in stages. At each stage, the founders give up more ownership in their company in exchange for the investment. These stages are typically tied to the development of the company.

Here’s a quick overview of a typical startup lifecycle:

  • Pre-Seed Stage
    A pre-seed company is often just an idea. Sometimes the founders’ personal money is the only money spent. Other times the founders accept a relatively small investment – often from friends or family. 
  • Seed Stage
    At the seed stage, a company has enough evidence to show that its idea has the potential to become a profitable business. The startup team is ready to start building that idea – whatever it may be – and they need money to build it. Seed investors can be friends and family, angel investors (wealthy people who invest in startups), crowdfunding sites (think Wefunder), or other investors.
  • Series A Stage
    At the Series A stage, a company has built its idea, sold it to a number of customers, and figured out how to sustainably grow the company. The Series A is typically the first big investment a startup takes – it can be 10 times as big as the seed investment, or even more. The most common investors in Series A fundraising are venture capital firms – companies that specialize in startup investments.
  • Series B Stage
    At the Series B stage, a company has typically achieved some degree of success. A company might seek Series B funding to hire a bigger team, to add more products, or even to acquire another company. As with Series A, the most common investors at this stage are venture capital firms.
  • Series C, D, E, etc.
    A startup can take additional rounds of investment money. This depends on several factors including the nature of the business, and how quickly it is growing.
  • Maturity
    Success! This can mean many different things, depending on the business. It might mean that the company goes public. It might mean that the company gets acquired by another company. It might mean that the company is chugging along, generating a profit, and no longer needs to take investment money.
Illustration: Startup finance lifecycle

Why a Series A Is a Big Deal

Series A funding is a pretty big deal for a startup. It’s one thing to convince your friends and family you have a good idea. It’s a whole other thing to have professional investors scrutinize every detail of your business and tell you what it’s worth.

Out of all the companies that receive seed investment, only 20-30% move on to secure a Series A.

And there’s a lot of money on the line.

The average Series A investment is currently in the neighborhood of $12 million. That amount can vary widely depending on the nature of the business. But whether it’s $1 million or $100 million, it’s a lot of money to a founder who started by working nights in their garage.

For a founder, a Series A represents a big opportunity and a big trade-off. They need the money for their business to succeed, but they’re giving up a big chunk of a company that’s been built with their sweat and tears.

The process can be very stressful. There’s a lot of preparation work and a lot of time spent in presentations (which may not be the founder’s forte), in addition to the stress of potential investors sifting through every detail of the business with a fine-toothed comb.

For an investor, a Series A is a significant risk. 90% of startups fail, including 75% of those that receive venture capital investments. This is the reason Series A investors are notoriously meticulous.

Venture capital firms examine every aspect of a business including its team, financial data, competition, growth plans, and much more. They’re not always impressed by great ideas. They’re looking for great organizations with great leaders. They work with a lot of startups, and they’re very good at identifying the ones that are most likely to succeed.

Illustration: Startup valuation

Summary

Series A funding is an important stage in the development of a startup. For many companies, it means that they’ve built a successful product or service, and they’re finally ready to watch their dream become a reality.

There’s a lot of money involved, and the process is grueling. If you know someone who’s working on a Series A, give them a pat on the back and a few words of encouragement. This could be a make-it-or-break-it moment for their business.

The biggest thing a founder can do to increase their chance of successfully closing a Series A round is to build a solid financial model that shows investors how their company will grow. That’s what we do here at Forecastr. We build great financial models to help founders succeed.

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