Many people view venture capital (VC) financing as an avenue to turn an idea into a business. In reality, your idea will have already turned into a business and hit several benchmarks before you can raise venture capital.
You need to develop a business model to sell your product or service, find someone to manufacture it, and, if it's software, hire talent to code it. Early financing will likely come from a seed round with angel investors to get the business going. And, of course, you must prove the business is actually viable.
After all this, you can raise series A funding.
Overview: What is Series A funding?
Series A is the first of what will likely be many startup funding rounds with venture capitalists for your business. Series A comes after you do startup seed funding and have a proven business model.
Venture capital funds rarely are interested in investing based on a hope and a prayer. They want to see tangible evidence your business and idea have strong potential growth.
There may be exceptions for strong management teams with a ton of experience starting up businesses and exiting with strong returns.
3 advantages of using series A funding
The advantages of series A funding are the advantages of jumping into venture capital funding.
1. Get VC rounds going
You may have several funding rounds in your future. And you won’t know when you're ready for an initial public offering (IPO) or to be acquired until it’s about to happen.
Series A funding will start the ball rolling with your first term sheet. You can get a handle on where your business’s pre-money valuation is and what the benchmarks will be to get to series B funding and then series C funding.
If your business is ready for accelerated growth, the faster you start your funding rounds, the faster you’ll get to an exit.
2. Hit a benchmark
Venture capital funding is a big benchmark. It means professionals, who sometimes work 70-80 hours a week analyzing businesses like yours, believe your business has strong potential to go the distance.
Potential employees will be more willing to take a chance working for you with venture backing and other businesses will see you as more than a floundering startup.
Venture capital funds, by the nature of the business, work with hundreds of managers and other investors. They can be a key source of future business or even talent. You can and should leverage your investors for advice on big decisions, mentorship, and potential new clients.
3 disadvantages of series A funding
Likewise, the disadvantages of series A funding are the disadvantages of raising venture capital.
1. Giving away equity
Venture capital funds earn carried interest. Carried interest is based on the return on investment the fund has in each of its investments. To increase its return on investment, the fund will try to get as much equity for every dollar invested as possible.
That equity comes straight out of your pocket, but it could be worth it. If you run a $1 million company, and VC funds will allow you to grow into a $25 million company, it’s better to own 20% of $25 million than 100% of $1 million.
But you could also be selling away your business. Do whatever you can in negotiations to reduce the equity you’re giving away. It could mean millions of dollars when you eventually cash out.
2. May not be ready
It’s usually smart to bootstrap your company and use angel investors for as long as you can. Grow your revenue as much as possible before you dip your toes into VC water.
The valuation you raise at series A could affect every round of VC funding. It’s easy to look at the valuation metrics for the last round and just apply them to the current round. If you take that extra year and keep growing on your own, you’ll have more leverage with series A negotiations.
3. Giving away control
Most VCs have experience with a business that had massive potential but was sunk by bad management. When they look back at those deals, they inevitably see several ways they could’ve gotten rid of the bad manager or set up stronger internal controls to keep the company afloat.
They will try to apply these ideas to your company. They’ll have you set up a board of directors and give seats to some of their employees. They’ll refer you to strong mentors. They may even want to approve any expenses over a certain dollar amount.
Most of the time, these things work out. It may be annoying to seem like you have a boss — why would you even have a startup if you were willing to be bossed around? — but successful VCs don’t just get lucky, they know their, uh, stuff.
How to find and secure Series A funding
Finding investors is just like finding customers. Here are a few tips.
Find a lead investor
Lead investors are often ex-founders who started and exited a business and now work for a VC. They should know your industry and be able to consult on the business if needed. They’ll also help you raise money.
Lead investors often pursue other investors to fill out the funding round and will be your main contact during negotiations.
Perfect your pitch
You may be familiar with the elevator pitch, so-called because it only takes as long as an elevator ride — short, but powerful and convincing. You may also have done pitch decks before.
Get to know these concepts well and don’t settle for first-level knowledge. Get your pitches down, and then have ready answers for any questions that may come up.
To the dismay of most founders, being the CEO of a startup is more about networking and politics than it is about the mechanics of the business. You have to be relatively good at the mechanics of your product to even come up with an idea for a startup, but to get the company growing, you’ll need to be great at networking.
You need to network and sell to find buyers for your product and to find investors for your company. Go to as many meetups as you can, perfect your elevator pitch, and leverage all your contacts.
If you simply don’t have a talent for networking (it happens), either lean on your product knowledge and act like you have nothing to lose, or hire a CEO and make yourself Chief Product Officer or something similar.
You’ll know when
You may have noticed that many advantages of series A funding can be paired with the disadvantages. You get money to grow but have to give away equity. You get new connections but have to give away control. You hit a big benchmark but you may not be ready.
There’s no way to know for certain in the moment if it's worth it to start VC funding now. You need to think long and hard about where your business is and what the potential profit and loss is to selling part of your company — only you can know when it’s time.