Financing rounds come in all shapes, sizes, and letters. Each raise has its own characteristics and players, and is situational to the current company’s position in the market. Most commonly, confusion arises among early stage financing, particularly with the benefits of seed vs. Series A financing. What classifies each, and who are the main investors that I should consider reaching out to?
Seed rounds fuel startup growth from a concept into something tangible and sellable. This type of financing, a lot of experts analogize, is like planting a ‘seed’ to grow a tree. Trees don’t grow overnight, rather they take years of care and management. Similar in finance, Seed rounds are primarily geared towards establishing the firm in the market and locking down an efficient, operable business model with validation of Product/Market fit. Only then, can the company begin to grow and branch out with alternative product offerings and generate (sizeable) returns.
Sometimes also known as an angel round (but usually strictly saved for rounds < $1M), seed rounds are most often ‘reserved’ for angel investors. As all angel investors typically have differing ticket sizes, the range for a seed round can range from purely angel seed rounds ($200k) to cash-rich VC-seed rounds ($1M). Many seed rounds can be funded through convertible notes (to mitigate risk for investors) and often don’t require a formal company valuation.
On receiving financing from a Seed round, investors expect you and your team to fine-tune your business model, foster business relationships, and adjust product to market demand. Most often, in preparation for future financing rounds (and a successful business), Seed round financings afford your team the opportunity to pivot to satisfy client feedback, thus gaining traction and validation for Product/Market Fit. Product and pricing can be tested relatively easily with the buoyancy of the seed round also.
Series A, on the other hand, rounds are often characterized by the potential of Venture Capital interest. Prior to Series A, Venture Capital firms often deem investments too risky. Typically there are several investors (all equity) hoping to gain some equity in the company (in exchange for a cash injection).
The fund itself is named after the type of shares the investors hope to receive- Series A Preferred Shares – meaning that during a liquidation event, they will be some of the first (preferred) to receive compensation. Companies often require auditable valuations at a Series A round too, to justify any claims of the founder when negotiating equity deals.
Funding goals for a Series A venture most often falls between $2M to $15M with a significant amount of equity being offered, often in the range of 30% . The investor pool is most often composed of Venture Capital firms looking for the ‘next-big-thing’ (lead investor) and the occasional ‘Super Angel’.
Series A financings are good once your firm has clear evidence of traction (Product/Market Fit), with significant growth in terms of revenue and customer interest. After raising a Series A, the main goal is to grow (and grow quickly!). Investors will usually try mitigate risk by guiding your team in directions they know and have exposure to, however prior to raising a Series A, you must critically ask yourself whether or not your firm is at the stage to expand rapidly.
However, these definitions are fluid and constantly changing. With the rise of new financing methods (think ICO) the textbook cap-raise protocols are being redefined and modernized. With this, and the rise of unicorn startups, these rounds have been inflated (Lucas Duplan raised $25M seed round with Clinkle, before the product had launched!). But, more often than not, Seed and Series A rounds are focused on locking down a repeatable and profitable business model, while generating traction. It is beneficial to understand the players of each round so you and your firm can tailor an appropriate pitch toward each group of investors and maximize your chance of successfully raising.