What is Series A Financing?
Series A financing (also known as series A round or series A funding) is one of the stages in the capital-raising process by a startup. Essentially, the series A round is the second stage of startup financing, as well as the first stage of venture capital financing.
Similar to seed financing, series A financing is a type of equity-based financing. It means that a company secures the required capital from investors by selling them the company’s shares. However, in most cases, series A financing comes with anti-dilution provisions. In other words, instead of selling common stock, the startups usually issue preferred shares that do not provide their owners with voting rights.
At the same time, it is quite common that the companies issue the convertible preferred shares. The shares offer investors with the option to convert their preferred shares into common stock at some pre-determined date in the future. Note that the investors’ returns from series A financing are lower than the returns from seed funding.
In addition to the more conventional methods, equity crowdfunding can also be used in series A financing.
Objectives of Series A Financing
Series A financing is primarily used to ensure the continued growth of a company. The common goals in the series A round include reaching milestones in product development and attracting new talents to the organization. In this stage of development, a company intends to continue the growth of its business to attract more investors to future rounds of financing (series B and C financing).
In the series A round, the biggest investors are venture capital firms. Commonly, they are firms that specialize in investments in early-stage companies. The general rule is that capital is provided to companies that already generate revenues but are still in the pre-profit stage.
How Does Series A Financing Work?
Unlike seed capital, series A financing follows a strictly formal approach. Venture capitalists that represent the majority of investors in this round of financing are willing to complete the due diligence and valuation process before making an investment decision. Thus, the processes start every substantial series A financing.
The valuation of a startup is an essential part in series A financing. Unlike startups in the seed stage, companies that are willing to secure series A capital are able to provide more information that can be used to make informed investment decisions.
The goals of valuation in series A financing include the identification and assessment of progress made by a company using its seed capital, as well as the efficiency of its management team. Additionally, the valuation process demonstrates how well a company and its management use the available resources, as well as its potential to earn profits in the future. Only when the due diligence and valuation processes are completed will venture capitalists invest in a company.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: