If you are reading this article, chances are you have reached the stage where your initial seed funding from family and friends has been wisely invested and you now need to apply for Series A funding (with Series B and C to follow). Congratulations! Getting your startup to this stage is a true testament to your hard work and perseverance.
To help you navigate the next stage of creating a solid, scalable, and ultimately saleable business, this article explains what you need to know about approaching investors whilst also protecting your interests. But be aware, this is not the time to skimp on professional advice. The venture capital investors/venture capital firm you will want to work with, i.e. the successful ones with plenty of contacts, are smart and astute. We mean this in the nicest possible way of course.
Often investors specialising in Series A, B, and C funding have created and sold startups themselves. So, whatever you do, make sure you have an experienced Finance Lawyer on your side ensuring your best interests are protected.
What is Series A, B, and C funding?
Series A, B, and C funding rounds simply refer to the process of growing your business through outside investment. In return for their capital, investors will take a share of your business.
Before reaching the Series A fundraising stage, a startup will typically go through the following fundraising exercises:
- Pre Seed Funding - this is used to launch your brilliant idea for a business into reality. Pre Seed Funding is not technically a funding round at all because most of the money will come from you and the other founders and supportive family and friends.
- Seed Funding - like planting a tree, seed funding is the first funding used to grow an already existing operation. It is used to finance product development, market research, and hire talent. Although friends and family often act as seed funders, the most common investors in this space are angel investors who will expect a stake in your company in exchange for their capital.
Many companies never move beyond the seed-funding stage. However, if the following indicators are true for you, it may be time to think about pitching for Series A funding.
How do I know I am ready for Series A funding?
There is no ‘right time’ to apply for Series A funding (also known as Series A financing or Series A round); however, VC firms may be interested if:
- Your business model is well established and can easily be scaled upwards.
- You have a solid legal structure in place as well as robust commercial contracts, terms and conditions, shareholders’ agreements, employment contracts, and risk assessments (particularly relating to health & safety and data protection).
- You understand who your customers are and how to reach them.
- You have obtained a realistic valuation for your company.
If you believe you are ready to apply for Series A funding, it is time to start researching venture capital firms. Like anything in business, securing the first investor is always the trickiest; once one comes on board, others will likely follow.
Pitching for Series A funding
Venture capital firms looking to invest are not interested in merely a great idea. They are looking for a great idea that also demonstrates a proven business concept and the potential to develop into a profitable, scalable business. You need to show that your company can provide an investor with a return on their investment (ROI).
To successfully apply for Series A funding, you need to provide potential investors with:
- A business plan - this should include the following:
- a summary of your business and its achievements so far
- your 12-18-month plan
- profiles of the executive team
- the problem you are solving
- your competitors
- where you fit into the market
- the risks to your business
- how much funding you require
- details of previous funds you have secured
- A pitch deck - there are lots of fantastic internet resources on creating a winning pitch deck. However, at its core, your pitch deck should include the following slides:
- the problem you are solving
- your solution to that problem
- market size and opportunity
- your product
- growth opportunities
- your team
- your competition
- how you plan to use your investment funds
Your pitch deck is essentially an overview of your more comprehensive business plan. It must be compelling enough to motivate busy venture capital investors to read the more detailed document.
What is Series B and C fundraising?
Series B and C fundraising rounds are essentially the same as Series A. The difference is in the purpose of applying for the funds. Series B funds (also known as Series B financing, Series B round or Series B funding) are designed to move your company past the development stage and/or expand market reach. Advertising, skilled employees, sales, technology, and business support don’t come cheap. Series B funding is used to invest in these areas.
Businesses that go on to Series C funding round (also known as Series C round or series C funding) are already successful and have a high valuation. Series C funding is used to develop new products, get a foothold in foreign markets, and even launch a Merger and Acquisition with/of another business in order to scale. Series C funding is all about scaling up as quickly and successfully as possible.
Four steps to take now to successfully apply for series A, B, and C fundraising
1. Evaluate whether you want to take this next step
It can be easy to get carried away with the excitement of starting a business and it is important to remember that you are supposed to have fun. There's nothing wrong with deciding to stop at the pre-seed or seed funding stage and simply invest your profits rather than take on new investors and their expectations. Take some time to think of your lifestyle and family requirements and whether scaling your business is right for you at this time of your life.
2. Ensure your administration and compliance are in order
And that you have up-to-date data maps, data processing contracts, risk management documents, commercial contracts, terms and conditions, and shareholders’ agreements in place.
3. Research your target investors
Research venture capital and/or an angel investor who have a history of investing in your type of business and sector. Make sure you understand their business and objectives before you approach them - failure to do so will result in a short conversation. Also, make meeting investors a key part of your networking strategy.
4. Pitch deck and business plan
Create your pitch deck and sharpen up your business plan. It's worth spending time to get this right and investing in professional help to ensure the problem your business will solve and where your startup fits in the existing market are expressed concisely and persuasively.
Ensure your company has a realistic valuation. Have you ever watched Dragon’s Den? You can see the terror in the pitcher’s eyes as the Dragons unpick the sales and revenue figures and expose the true (usually much lower) value of the company. Don’t risk overinflating your offering, any switched-on investor will immediately spot the holes in your figures/projections.
Questions about funding?
Getting a new business up and running can be an exciting new venture, but for many difficult to navigate. Startup funding, Mutual funds, Series A, B and C, Seed Stage/Seed funding/Seed Round, Ordinary Shares - what do they mean and where to start?
Every business needs funds, as you kick off your startup getting funding and whether you need to issue new shares are important considerations. Knowing about series a b and c funding and seed capital can make the difference and having the right support and legal advice at your side can be extremely beneficial.