What can I say after all that time and effort? Today’s situation can get pretty confusing:
- Pre-seed is a round before Seed that is larger than $250K
- Seed is the first round to be larger than $1M
- Series A is the first round to be around $4–15M
Beyond figures, what are the real differences between Seed and Series A?
In large markets (US, UK), it is becoming possible to raise significant amounts of money (from $250K up to even a few million) with “relatively little”: a great founding team with a strong network, a brilliant idea in a massive market, and a great pitch deck that neatly portrays the vision. This is what happens in many Pre-seed & Seed rounds.
Many founders expect that because they raised a Seed round (perhaps even a very large one), they know what the A process will be like. But once you make it past Seed, the game changes — you’re now hunting for serious growth and need more capital to scale.
While the Seed round may have taken just a few weeks without much fuss, now things are going to get much slower, even for the best & most well-connected Seed-stage founders. Why? At least 9 reasons.
(1) Series A is about the future… and the past 🔮
While Seed was likely the first time you raised money, this time you’ve got a track record. So, while previously your role was to promote your founding team and portray an exciting picture for the future, now your pitch will be about the past, too: how well did you spend the money you raised before? How good have you been at hiring? Relative to back then, where are you now? etc.
(2) Now you have a team to think about 🤹🏼♂️
While your SeeThis means that the useful tip “one of the co-founders should spend 100% of their time on fundraising” is difficult to apply.d round probably involved you, your co-founders and one or two employees, it is very likely you now have between 8 and 50 team members. This means that the useful tip “one of the co-founders should spend 100% of their time on fundraising” is difficult to apply. At Series A, there’s so much going on internally (much of it critical to being able to fundraise) that taking your eyes off the day-to-day and focussing only on fundraising is not really an option. Good time management will be crucial, and it’s never too early to start thinking about how to handle it all during your fundraising process. Here’s how some of our friends at Tessian, Farewill & Signal AI approached the challenge.
(3) For Series A, Due Diligence is real… 📊
The analysis & paperwork you go through at Seed is usually simple. The terms of the round tend to be low-touch and investors can also invest via convertible notes and SAFEs, making the process relatively smooth. In this sense, raising a Seed round can be done about as quickly as you can meet and convince investors.
But closing a Series A will take much longer, normally several months from the day you start thinking about it until you have cash in the bank.
Since — for the first time — VCs are putting serious amounts of cash into your company, they will need serious reasons and data points to justify the bet to their LPs. To get it, they’ll start behaving a bit like Private Equity funds, doing significant amounts of Due Diligence (DD).
They will break down your company into a set of boxes that need to be checked off before making an investment. They’ll dive into things like product / acquisition / unit economics & capital efficiency / sales machine / acquisition / scalability / growth predictability / retention / team / finance & budgeting / market & competition / value chain, etc…
(4) … and you’ll see many things for the first time 🤷🏽♀️
The complexity of DD is typically exacerbated by the fact that most founders have never been through the process before and are not particularly familiar with the terms used or the materials they will have to prepare.
After all, as an early-stage founder, you aren’t thinking that your role is about preparing a Data Room, or building and running a full scale financial model, or negotiating your liquidation preference. Turns out, those skills will help! Here are two articles to give you an idea of what you’ll need to be ready for:
- YC’s Series A Diligence Checklist — Aaron Harris, YCombinator
- 3 things founders need to think about before negotiating a Series A round — Maija Palmer, Sifted
(5) It’s hard to know when you’re really ready for Series A 🐛
While most startup content will give standardised revenue benchmarks (e.g. to raise an A, a SaaS company will need $100K in Monthly Recurring Revenue (MRR), while a marketplace startup will need $250K in Gross Merchandise Value (GMV) per month…), reality tends to not be that simple:
As Aaron Harris says, knowing when to start fundraising is difficult because Series A sits in a strange area, the point in between being a newly founded company raising on promise and being a maturing Series B company raising with in-depth metrics about the health of the business and the impact of additional capital on that business).
And so even though investors do dig into your metrics and go through a strong DD process, there aren’t really that many proof points you can show at this stage.
In this sense, you are ready when you can convince a VC to give you a term sheet. That is going to be easier when you’ve achieved compelling intermediate milestones that show VCs that access to cash is the real constraint to scaling your business.
Therefore, a good series A round is not so much about being right as it is about looking right. The way you structure your data and tell your story can be as crucial as your metrics, if not more so. (And I’ll soon publish a post about what I’ve learned about Series A storytelling. Until then, this post by Justin Kan can give you an idea of what to prepare.)
(6) At Series A, timing is a serious matter ⏲
Ok, so you never really know when you are ready. On top of that, for one of the first times in your startup’s history, Series A includes a ticking clock: your runway. For this reason, you’ll need to juggle a bunch of things at the same time:
- You don’t want to start raising too early (e.g. when you still have 20 months of cash in your bank account), because it will be very difficult to create a sense of urgency and spark investors’ interest.
- As you’re moving towards your raise, you’ll want to be strategic and increase your spending to create a sense of urgency and show you’re capable of spending more money
- However, you don’t want to “gamble” too much and not leave yourself any wiggle room. With just 1 month left before your company dies — regardless of how high your monthly revenue is — it will be very difficult to convince investors to give you several million more.
- You also need to watch out for tricky fundraising periods. For instance, starting to raise on the 1st of December can be very difficult, as the holiday season will more than likely slow your process down by a month.
- Bonus: you can be tactical and start raising when you expect good news in the near future. There is nothing more powerful than dropping big news (“We just closed our 2nd biggest client for a $500K contract”) in the middle of a process that is already going well.
Yes, it’s a lot of things to think about. In a nutshell, this will be you:
(7) Series A is a numbers game, and a tougher one than Seed 🔫
Like with your Seed round, you will have to speak to a large number of investors / funds for your Series A. However, there aren’t as many Series A funds as there are Seed funds and angel investors that can invest in Seed.
So you’re in a situation where you still need to speak to a massive number of investors, but you’re starting with a much smaller pool of them.
What kind of numbers can you expect? The companies that raised a Series A coming out of YCombinator’s Series A Program had 30 coffee meetings with individual investors. 50% of those meetings led to pitches to individual partners. About 30% of partner pitches led to full partnership pitches. On average, 1 of every 5 partnership meetings produced a term sheet.
Finding 30 investors that could be interested in your sector and stage can be very difficult, especially if you’re not based in the US. This is one of the reasons we built AAA.
(8) Your VC at Series A is more crucial than at Seed… 💒
It’s not just about the numbers. You need to choose your VC wisely, because Series A investors are very likely to take a board seat and work with you for the long term. Given the DD they did on you, they are the ones with the best knowledge about you and so will be considered by follow-on investors as the reference investor: if you raise a Seed with a VC and they don’t follow up, nobody cares because it could be due to many reasons (i.e. no money to invest right then, etc.). However, if your Series A VC doesn’t follow you in Series B, it’s going to make things difficult…
(9) …And you need to convince teams, not individuals 👪
It’s very uncommon for a single person at a VC fund to be able to make the call for a Series A all by themselves. And so if someone else within the fund is against the deal… the deal won’t happen. It comes down to a game of internal conviction and politics, which wasn’t the case at Seed, where an investor is more likely to be able to write a check with relative independence. The materials you’ll prepare are crucial, because they’ll affect how your deal is marketed within a fund: your deck & data room will be read by people you’ve never met, so be sure to give them all of the information they need in a nice & unique format.