Jun 7, 2024

What Are Series A Startups and How Do They Work?

If you’ve just started entering the startup world and know nothing about funding rounds or investment opportunities, don’t worry; you’re not the only one.

Most startup founders don’t even know what a venture capital firm or a Series A funding round is in the beginning. All they have is an innovative idea to develop.

In this article, we’ll give you all the details about what Series A startups are and how they work. You’ll also find out who grants the funds to develop a startup and how to get a Series A funding round.  

What Are Series A Startups?

A Series A funding round is typically one of the earliest and most important stages in a company’s lifetime.

The startup in a Series A round usually gets through seed funding and several other funding rounds, proving itself as a viable business entity.

A Series A round is a type of funding round in which startups or small companies seek substantial capital inflows from venture capitalists, angel investors, or institutional investors.

This is their big investment round, usually directed toward the team’s expansion.

This round occurs after the seed stage, where initial funding is secured to develop a product and slowly enter the market.

To get Series A funding, startups should achieve certain milestones and prove future or present profitability.

Compared to other types of funding, Series A is characterized by the amount of money raised and the characteristics of the investors.

At this stage, we can already see private equity and venture capital firms getting involved, which is always a good sign of healthy growth and expansion.

In terms of the startup that receives the venture capital funding, it should present more than just an idea.

A company should have clear evidence of a sustainable and scalable business at this funding stage.

Without a solid foundation for long-term success, no investor will ever pour money into a startup company.

In return for their investment, Series A investors receive equity in the company.

This means they are now the owners of preferred stock and can directly interfere with the company’s policies. In most cases, the involvement goes beyond providing capital.

They offer guidance, industry connections, and strategic insights.

Where Can Startups Receive Investment Rounds From?

Here are the five most popular funding sources for startups and small companies looking to grow.

Angel Investors

Angel investors are typically high-net-worth individuals who provide funding to startups in exchange for convertible debts or equity.

They usually enter the game early, when the startup is getting off the ground.

They often have entrepreneurial experience and can offer mentorship, guidance, and significant capital inflow.

The size of investment they provide ranges from thousands to millions of dollars.

Venture Capital Firms

Venture capital firms don’t pour their money into a startup.

Instead, they pool money from various sources, such as lower-grade companies and wealthy individuals, to invest in companies with growth potential.

They usually don’t deal with early-stage startups, instead going for more developed companies.

By leveraging their connections, expertise, and experience, venture capital firms help seed-funded companies succeed on the open market, developing a sustainable business system.  

Investment Banks

While not interested in directly providing startup funding, investment banks are usually involved in raising company capital.

They can facilitate startup funding through various means, such as IPOs, M&As, and private placements.

They structure the deals, find external equity funding, and navigate complex financial transactions.

They can charge fees, take a percentage, or receive equity for their services.

Hedge Funds

Hedge funds are the biggest investors a company can attract.

They have huge amounts of free cash to invest, as their activity is directly linked with the availability of quick liquidity in the company.

On top of that, such companies can have higher risk tolerance than investment banks, which is a huge advantage when investing in startups.

Government Grants

If a startup is engaged in research, innovation, or any industry linked to government priorities, you can benefit from a grant.

These grants are non-repayable, meaning you don’t have to give up equity or a future profit percentage to receive it.

However, the application process is competitive, with hundreds of young entrepreneurs and experienced founders waiting for free funding.

Top Ten Tips on How To Get Series A Funding For Your Startup

Here are some valuable tips on how to get Series A funding for your startup.

1. Demonstrate Product-Market Fit

The product-market fit indicator is crucial for a startup seeking Series A funding.

You need to convince the investor that your customers use your product daily.

If you develop a product or a prototype that doesn’t have real demand on the market and doesn’t meet the customer’s needs, you will never receive a Series A round because your initial idea was useless.

For example, imagine you are a company that wants to develop a new type of electric motor.

However, your innovative motors have less power and consume more energy than the ones built by existing companies.

You won’t ever reach a Series A round, not even talking about Series B funding.

That’s because your products won’t meet the needs of the masses – more power for less cost.

2. Develop a Scalable Business Model

Startups that receive venture capital financing are meant to grow and bring in more profit each year.

Eventually, the ultimate goal of most startup founders is to reach multi-billion valuations and grow into an international corporation.

If you don’t have a scalable business model, you won’t ever be able to do that.

For example, you can’t build a corporation from a private school or a coaching business.

These are non-scalable businesses that are heavily personalized.

The best business model from this point of view is a SaaS company.

These enterprises heavily rely on automation and non-human work, meaning they can develop and scale with lower costs than human-related businesses.  

3. Build Relationships with Investors

Given that you have the same characteristics as your competitor, but he is a friend of the investor, who do you think will receive the funding?

Of course, the investor will go to his friend because they already have a relationship.

To mitigate that risk, start networking early. Go to industry events, join startup accelerators, and don’t hesitate to make friends.

If you don’t know how to do that, read “How to Find Friends and Influence People” by Dale Carnegie.

After you skim through it, you will understand the importance of friendship in a business context.

And more importantly, you will understand how to build high-value friendships with anyone, be it your local farmer or an institutional-grade venture capitalist.

4. Demonstrate a Large Market Opportunity

Investors like companies that target big and growing markets.

This is the easiest way to make a lot of money for them, and that’s why they will search for companies targeting large markets like software development, video communication, or social media.

Zoom, for example, received its Series A funding round solely because it targeted one of the most underdeveloped yet popular markets in 2013, the video communication one.

With the pandemic and the remote culture that emerged afterward, the investors of Zoom made a lot of money on one investment.

Yet, if the upper management of Zoom hadn’t targeted this industry at the right time, they would’ve never received $6 million in Series A funding, $6.5 million in Series B, $30 million in Series C funding, and $100 million in Series D.  

5. Have a Clear Exist Strategy

When founding a startup with the involvement of pre-seed funding, Series A, and other types of financing rounds, you MUST have a clear exit strategy.

Without it, companies and wealthy individuals won’t even touch your startup, as they won’t be able to get their investment back.

The most popular types of exits for a startup are IPOs and M&As. With an IPO, the company goes public, allowing the investors to sell their stake on the open market.

In the case of an M&A, the startup is bought by a bigger company for its technologies or just to kill the competition in the market.

In this case, the investors take a cut of the sum received by the founder in accordance with their equity.

If your initial plan is to take the company public or try to sell it on the open market, an investor will most likely choose your project.

6. Perfect Your Pitch

Even if your idea beats Elon Musk by a mile, you won’t ever raise as much money as he did without a great pitch.

In business, the ability to sell is crucial, especially if you want to raise tens of millions of dollars for a startup that might never turn profitable.

In this case, you need to get as prepared as possible.

If you aren’t the best speechwriter and orator, you should take some courses and start learning this art. Then, start writing your pitch.

Include all the details described above about the expansion, the market, and the exit strategy.

Don’t use fluff; investors will see right through it. Talk only about the things you’ve done or the things you know 100% you’ll get done.

After the crash of 2008 and the recession of 2020, investors are much more conservative.  

7. Have a Clear Plan to Use the Funds

Having a business plan, a.k.a. a clear way to spend the money you’re about to receive, is a great method of getting access to a Series A round.

If you come to an investor with an idea and an Excel table of all the planned spending and the ROI on those investments, you’ll increase your chances significantly.

To do it, you should compute all your costs for maintaining the team, investing in new products, buying or selling raw materials, and much more.

You should also estimate the revenue and profit for at least six quarters after the funding enters your bank account.

Pro Tip: Always leave some of that money to pay unpredicted costs. For example, if you get sued for a patent, you’ll need a war chest to fund lawyers.    

8. Build a Strong Team

You can’t do everything in the company.

Once you reach a certain level, you should learn to delegate some of your responsibilities to others.

You need to gather smart and driven people around you to do that.

The main goal of a startup founder is to find team members that won’t work for money but for the idea.

They will conquer the world for you if you find such a team.

You don’t even have to pay them a lot of money.

Usually, startups pay their employees a percentage of cash; the rest is paid in stock.

This way, when the company goes public or is bought by a bigger player, the employee can cash out on his investment.

9. Show Traction

Investors, just like banks, love to look at the numbers.

If you can show them consistent growth in your key metrics, be it higher session times, increasing sales, growing daily active users, or anything else, you’ll hook them.

Securing partnerships, growing your media presence, or successfully entering new markets can also show traction.

In other words, investors should see that your company is growing in expenses, revenue, and other economic activity results.  

10. Show a Competitive Advantage

If you can differentiate yourself from other companies in the industry, you’ll catch the attention of potential investors.

In today’s startup landscape, where thousands of companies are open daily, you must have an advantage, a trait that will make you shine.

Wrapping Up

Now that you know everything about a Series A startup and how it works, you can use this knowledge to open your deal or try your hand at someone else’s innovative startup idea.

If you are one of those who has started a successful company, don’t forget to share your experience in the comments.

Also, don’t hesitate to share this article with one of your friends who wants to try their hand at startup life!