Many startup founders struggle to secure funding for the expansion of their companies after raising the Pre-Seed and Seed rounds, especially in 2023. CB Insights found that only 48% of startups manage to attract Series-A funding, after a Seed round. Fundraising in Series-A is much more challenging and requires a more careful and detailed strategic planning compared to earlier stages. Startups may fall to liquidity bottlenecks if they fail to successfully attract funding on time which may pressure the company to raise at more unfavourable terms.
Fundraising in 2023
Fundraising environment in 2023 is highly affected by the global macroeconomic environment. Thus startups experience additional difficulties to raise funds due to higher degree of selectivity on the investors’ side since they are more reluctant to deploy funds in new opportunities and rather focused on maintaining their existing portfolio startups. In this article, we elaborate on the specifics of Series-A funding rounds today and we also propose some good practices founders can use.
What is Series-A
After a startup has raised a seed round and made substantial strides toward realizing its objectives and reached certain milestones, such as developing an MVP and growing an initial customer base, it enters one of the most important stages of investment known as Series-A investment round. This stage of financing is meant to assist startups in growing their businesses and achieving their goals. One of the main characteristics of Series-A funding that differs it from previous stages is a readiness to significantly scale its already proven idea and raise capital mainly for business development. Prior to this investment, startups are expected to develop and launch an MVP, then receive feedback from its initial customers as well as gain some market share. It all comes down to a proof in product-market-fit, which has to be achieved in order to qualify for such a round. Investors consider proven traction as a crucial element for startups to receive Series A funding. Accordingly, founders must back up their claims with traction of a developed product, customers as well as strong professional backgrounds and expertise.
In order to attract Series A funding, startups must convince investors of their unique value proposition as well as the ability to fulfil commitments and established targets. A couple years ago more than one million in ARR was the minimum threshold for investors to recognise sufficient traction. Today we see plenty companies showing even EUR 3-5m in ARR. Competition for Venture funding become tougher. In the process of many back-to-back 30 min pitches with busy investors, founders must remain calm and present their companies at their best. Typically, a Series-A funding round in Europe ranges between €1.5m and €8m depending on the company’s industry and geographical focus. Series-A funds are primarily used to scale, expand into new markets, acquire key personnel, and create the infrastructure required for mass expansion.
When to raise a Series-A
We advise entrepreneurs to take into account the following important factors when deciding on when to raise a Series-A round:
- Product-market fit – For obtaining Series-A financing, a startup is expected to demonstrate that its product or service has already established product-market fit and that a company targets a large enough, fast-growing, and highly-scalable market.
- Proven traction and room for growth – Established initial customer base and the existence of market demand that can be addressed with more investment.
- Realistic and well-aligned growth strategy – It is essential to develop a well-defined growth strategy using data of the market entry with MVP to indicate investors that the firm has a clear path to scale its product and achieve the next stage of growth.
- Experienced team – Having a solid and competent team boosts investor confidence and contributes to securing Series-A.
- Competitive advantage – It is crucial for receiving Series-A funding to demonstrate a superiority of the startup’s product to similar products in the market using data of a launched MVP. It is also important to show how it will be able to take over the existing market and its competition’s market share.
- Runway – It is important to have sufficient runway left to not have pressure in the fundraising and negotiation process. Generally investors like to see at least 9 months runway at the start of the fundraising process (with additional 3 months of fundraising readiness prior to the start of the process).
What to include in your pitch-deck
As we already mentioned, when conducting due diligence for a Series-A investment round, investors are more selective. As a result, they have higher demands for portfolio startups at that stage. Therefore, for raising a Series-A round founders should approach creation of a pitchdeck special attentiveness. We recommend including certain items in a pitch deck for the given investment stage:
- Goal – A short summary of the company and the value it is contributing
- Market – Presentation of market trends and its development, including growth estimates. It should also demonstrate existing demand which can be fulfilled by a startup’s product after its scale through a Series A investment round
- Problem – Description and proof of a relatable problem and target audience affected by it
- Solution – Full description of how your product solves an existing problem, and can monetize it
- Traction – Especially relevant for a Series A investment round. It is crucial to demonstrate existing achievements of a startup, which can include revenue growth over time, key accounts and their sources (big clients), and key milestones
- Competition – a startup should explain why it is different from its competitors and how they can monetize this difference.
- Financials – Startups must prepare a comprehensive financial plan that is well-aligned with their growth strategy and realistic in its projections as well as based on past performance. At this stage, it is crucial for startups to have growing financials and KPIs.
How to raise a Series A
The next stage in raising a Series A investment round is to structure documentation and construct a data room. This would consist of all relevant documents that can verify a startup’s legal position, indicate its business model, demonstrate its proven traction as well as present its growth plan. DOWNLOAD a checklist with all relevant due diligence documents here. It is important to align an upcoming investment round with existing shareholders and prepare the terms of a funding round. After that you will start searching for investors that may be interested in investing in a startup. For that purpose, creation of a target long list of prospective investors would be the best tool. Using that investor long list, founders can start contacting potential investors.
Reaching out to potential investors
The fundraising startup must be ready to respond to challenging inquiries. It has to provide more details regarding the company’s development strategy and financial projections during these meetings. To keep investors interested and involved, it is critical follow up with them after each interaction. This stage can be the most difficult for many startup owners. They face limited access to a network of investors, difficulty with approaching investors, pitching, and negotiating favourable terms. The normally short runway makes fundraising even more stressful for founders. That often leads to mistakes along the way due to having to also operate the business. As a result, many startups fail to raise a Series A funding round.
Getting the right support
Given the current fundraising environment, one of the most effective solutions to overcome the fundraising complexity could be hiring an consultant. The consultant can help with all issues which startup founders are facing during that process. Experience in deal structuring can be very helpful. Downrounds have become the new normal, but they are not a must if you set the terms right. Venionaire Capitals transaction service team (based in London and Vienna) is an entrepreneurial partner of both startups and investors. As an investment company specialized in Venture Capital and Private Equity, we have been supporting more than 100 deals since 2012.
What we offer
We offer valuable advice through due diligence, valuation, deal structuring, and deal negotiating. Our expertise and investor network enable us to provide startups with the necessary support and guidelines to ensure their chances of successfully securing the funding they need to grow and succeed. We dedicate ourselves to helping startups reach their goals. So we welcome them to work with us and benefit from our expertise.
In addition to our advisory services, Venionaire will always also look into direct investments through its actively managed funds, for the best deals run by its transaction team.