What is the difference between seed and Series A rounds? How do these funding rounds differ for startup entrepreneurs?
You don’t just ‘get funded’ as a startup. Funding comes in waves or ‘series’. There can be a world of difference between fundraising rounds. As a founder, it is your role to understand these differences and prepare for them in advance. Everything relies on it.
So, how many rounds of funding may you have to raise for your startup venture? What’s new at each stage that you need to be ready for?
The Ultimate Guide To Pitch Decks
How Funding Rounds Differ
These are just some of the factors that will vary at each stage of business and fundraising.
Investors will have different expectations and priorities at every round. This ranges from everything riding on the team and problem in pre-seed rounds to cash flow and profitability in late-stage funding rounds. As you progress investors will have higher and higher expectations of your data, financials, and team.
Pitch Deck Sizes & Content
The earliest rounds just need a few slides and a one-page business plan. Later rounds will mean more data and content to include in your deck, and more meat expected by investors during pitches, meetings, and due diligence.
You’ll have a lot more going into your data room as you grow and mature. Your pitch deck slide count may scale from a handful to 20 slides.
Once you get to late rounds you should also be taking into consideration that an exit may be equally as likely as raising more funding when you go to the market. You may end up (being acquired) or in a merger instead of putting more capital in the bank.
Types Of Investors
There is a very diverse pool of investors who invest in startups. While lines are blurring and firms and funds are stretching in either direction, these investors are very segmented by the stage of your startup and round.
This runs the gamut from friends and family, to startup accelerators and incubators, angel investors, angel groups, venture capital firms, strategic corporate units, and private equity funds.
There are various ways to fund your startup venture. This can range from loans to grants, donation crowdfunding, and equity capital.
Sometimes you may find a combination of these terms. Or you may start with convertible notes that can turn from debt into equity at a later date.
Some may have to be repaid. Other money may come at the cost of ownership and control of your business and giving away board member seats.
Where The Money Is
While startup ecosystems around the world are evolving and maturing and popping up in new places, and venture capital is also gradually expanding globally, each startup and round can require looking in different places.
Some regions, countries, and hubs are much friendlier for raising for certain types of startups. In other scenarios, it is the size of capital needed that is the issue.
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Many countries just don’t have the volume of capital needed as you progress through the stages. Or they aren’t aggressive enough. Then there can be specific regional advantages of having local investors.
This is why, you must understand what is the difference between seed and Series A rounds when trying to get funding.
Keep in mind that in fundraising storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
A Quick Guide To Startup Fundraising Rounds
Startups are raising more and more rounds, and are often staying private much longer and until they are much larger than they used to.
This isn’t always the case, but if you have that much conviction and commitment to go in on this startup, then you also need to be prepared to go through multiple rounds of funding before an M&A deal or going public.
These are some of the rounds you may progress through if you make it long enough or stay private long enough.
These are small starter rounds that help initially get new companies off the ground. You’ll give up the largest chunks of your company when raising during early stages like this.
Some entrepreneurs choose to skip right over this and bootstrap their way through to the Seed or Series A stage.
Seed rounds are getting larger. Though this is when the first meaningful outside money often comes in. it’s seeding the company to really get going.
If you’ve made it this far you’ve built something of substance. It’s not perfect. There are still some things to work out. Though you’ve got some great proof points.
By this stage, you have the fundamentals of a real business. You may not be huge or profitable yet, but you are on the way. Capital at this stage can make the pivotal difference between failure, or staying a small business and really becoming a fast-growth startup.
Series C is about getting the funds to scale. It’s time to go bigger and faster. These are often very big rounds.
Series D, E & Beyond
These late rounds have become much more common. They are big rounds. Rounds often used to acquire other companies, expand globally, and fill in gaps before and exit.
It is not uncommon for startups to host a bridge round in between earlier rounds. This can be to fill financial gaps when more runway is needed to hit major milestones and qualify for better terms and a new level of investors.
Or perhaps when there is a crisis or the market is just attractive, and it makes sense to bulk up on capital in advance.
Seed Vs. Series A Rounds
These are two of the most important rounds, and the most common that startups and their founders will have to fund their way through.
So, What is the difference between seed and Series A rounds? How do you ace them?
As the name suggests this round is all about seeding the company. Giving it the financial start and nourishment it really needs to have a chance and to have a chance to do things well.
Preparing For A Seed Round
Unless you are a serial founder who already has a few big rounds and startup exits under your belt then there is a lot of work to do here.
You have a lot of work cut out for you to build your credibility and network and to build relationships. You might be doing a lot more marketing and PR.
Seed Pitch Decks
Seed round pitch decks are short and lightweight. Experienced investors know that many of your plans and designs are going to change a lot in the months ahead.
This deck is about getting their attention, speeding them through the pitch, and getting them to take the next step. 10 slides are enough. Any technical details you do want to share belong in your data room, not your intro deck.
You should have enough research and data to warrant you pursuing this and taking up their time. Yet, they also know you are still pretty much riding on an idea and passion for solving a specific problem.
Expect investors to be most focused on how big the market is, how well you’ve validated the problem and demand for a solution, and how much confidence they can have in your founding team seeing this through to delivering great returns for them.
Investor types can vary widely at this stage of the fundraising game. They may be individual angel investors or even big well-known VCs. Startup accelerators can also play a significant role at this stage.
So, take the time to understand what is the difference between seed and Series A rounds before approaching the right investors.
Use Of Funds
By this round, you may or may not have completed developing your MVP. You may or may not have sales and revenues. This round should provide the capital to complete a product, start testing a business model and begin compiling more data.
Funds raised at this stage are often also used for hiring more developers and key team members. Getting funded and bringing in notable investors can help bring extra credibility to the recruiting process. Marketing is also a top use of funds at this stage. Especially for executing on the go-to-market plan.
A Series A funding round is really about stepping up the game. It is about building on the foundation and starting to become a serious player in this space.
Funding at this stage can provide notoriety and prestige. That can help get noticed, ink important business deals, draw more talent, and cement a position as a market.
For investors, this can often be about pre-empting their competition from backing what may be the winner in this space. As well as making sure they don’t miss out.
Preparing For A Series A Round
Hopefully, your well-chosen Seed-stage investors will have been busy making introductions and connections to Series A level investors for you.
Though these investors can increasingly be in a whole new class. That means you still have a lot of work to do to get noticed, build relationships and build trust and credibility before you get to actively raising.
Series A Pitch Decks
You should have more tangible data, facts, and details to report by this point. Yet, it is still important to keep your pitch deck streamlined.
Unless you have substantial revenues, then you still may need as few as 10 slides in your deck. Again, put the meat you really feel compelled to share in your virtual data room, not the deck itself.
Figure out what is the difference between seed and Series A rounds when working out your strategies.
To be considered for a Series A round of funding, then you should already have a product and some traction. Your MVP should be working, with more development going into enhancing that.
You should be able to demonstrate product-market fit, and know your unit economics. Investors are looking for that hockey stick-shaped growth, even if it is more in terms of customer acquisition than revenues and profits.
You should have the foundations of a viable business. It’s functional, if even still glitchy, in need of polishing and more capital to get to the next stage.
Series A rounds have been getting much bigger. This also means you will be dealing with a new level of investors who have the capital to comfortably participate at this scale of financing, and have the expertise to lend to manage it and the next phase of progress well.
This is generally the domain of VC firms. Though you may also find corporate investment partners. Recognize what is the difference between seed and Series A rounds before you approach them.
Use Of Funds
Series A funding often centers around adding fuel and runway to a company that is proving it can be notable and deliver great returns for investors. This money may help work out some kinks and button-up unit economics, though is ideally being used to grow the company. This may be through hiring, entering new markets, and scaling marketing.
Keep focused on the fact that your Series A funding is meant for getting you through to your Series B. That means achieving clearly set business milestones. The investors you choose in this round should also be strategically chosen to help you set up an easier B round.
Startup funding comes through a series of rounds. The Seed and Series A rounds are two of the most notable and pivotal for startups. Every round is different.
These two present one of the biggest leaps in investor expectations and sizes of investors. Understanding and preparing for this can make all the difference in how easy funding comes for your startup and the future of your venture.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.
I cover What Is The Difference Between Seed And Series A Rounds in the video below.
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FULL TRANSCRIPTION OF THIS VIDEO:
Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about what the difference is between Seed and Series A Rounds? Before we get started, make sure that you hit that Subscribe button, and this way, you will never miss out on any of the videos that we roll out every week.
As a founder, as an entrepreneur, or the operator of a business, especially when it’s a hypergrowth business, you’re going to be dealing with those two rounds: Seed Round and Series A, and also the ones that come after the Series A. As the company has a life cycle, it also has different financing cycles that go in parallel. In today’s video, we’re going to be breaking it down for you, so you really understand the difference between one and the other. So, without further ado, let’s get into it.
As a company, you’re going to have different types of financing cycles. Everything starts with the Seed Round. Then, you’re going to do the Series A. Then it’s going to be the Series B, and then it’s going to more of the same all the way to the liquidity event, which is essential via an acquisition, an IPO, or a secondary sell of shares where existing investors sell their shares to new investors that want to come in.
Remember that as the company matures, it will go from one financing cycle to another financing cycle every 18 to 24 months where you’re raising more money, and ideally, hopefully, at a large valuation. But that’s exactly what you’re going to be encountering. Let’s get into discussing what the differences are between the Seed and the Series A.
The Seed Round: The Seed Round is the very first round of financing that you’re going to be encountering. This is the round that comes after the Friends and Family, which is the first initial pool of capital to get going. Now, anything before a Series A, whether it’s a micro-seed, a pre-seed, or whatever seed, it’s still a seed round. On a seed round, what you’re doing is you’re raising an amount that is going to go toward meeting the expectations that you’re going to be getting 18 to 24 months later.
When you are at a Seed Round, 1) The investor is going to expect that you have the founding team in place, ideally, people with credible skill sets and expertise. 2) You have a roadmap for the next 18 to 24 months where you’re showing them how you’re planning to execute and to deliver on your promise.
When it comes to the amounts, Seed Rounds typically tend to be anywhere between $200,000 all the way up to $2 million, which is typically the average around $2 million is what I’m seeing on the East Coast and the West Coast in the U.S. Typically that is what you’re looking for. On a Seed Round, the types of investors that you’re going to be bringing in are going to be quite broad. That’s going to be angel investors, angel groups, micro-VCs, and that could also be family offices.
Now, let’s talk about the Series A. The Series A is for the very first time and the round of financing where you’re going to be encountering institutional investors like venture capital firms. Venture capital firms are completely different from the investors that are mainly individuals that you’re going to be encountering at a Seed Round because venture capital firms, the due diligence process is going to be more extensive.
They’re going to expect you to have validated the business model, that there is product/market fit, and that you already have a clear understanding of how money is coming in, how money is coming out, and how the full cycle continues. So, if they give you $1, how many dollars can they take out? They want you to really have a clear understanding of those metrics.
In addition to the founding team, they’re going to need to know that you have the right people seated in the right seats of the bus when it comes to the team because, as the book, Good to Great says, “At the end of the day, a startup is all about having the right people in the right seats of the bus because if that’s the case, you will eventually get to the successful path.”
When it comes to the Series A, it’s very interesting because, here, you want to do as much due diligence on the investor as much as they are doing on you. Here, you want to go after investors that can add the following:
- Access to M&A opportunities
- Access to talent
- Access to distribution like partnerships
- Access to business development deals
When it comes to preparing for a Seed Round or perhaps a Series A Round of financing, the preparation is going to be the same because those are rounds that, at the end of the day, they’re going to take you anywhere between three to six months to complete from Point A to Point C. But the way that you’re going to be thinking about those is first you need to prepare. That is creating your pitch deck, creating the financial model. In the financial model, you’re going to be including the valuation, the amount to raise, and the projections, where the money is, and how the company is going to be performing over the course of time. On the pitch deck are 15 to 25 slides. By the way, you can use the pitch deck template below that is for free that founders are using to raise millions all over the world.
In terms of preparation, it is probably going to take you about a month or two. Then it’s going to be all about getting out there and making sure that you have a good target list of investors that you can tackle on. You want to go after the people that have the money for you. Those are people who have the right type of investment thesis that would be excited to invest in a business like yours. The investment thesis is all about the geographic location where you are, the segment that you’re in, and also your financing cycle.
Again, you’re not going to go for a Series A investor when you’re at a Seed Stage. That’s a big no-no, so go after the investors that can give you the money. That’s what it comes down to in preparing for a Seed Round or for a Series A. They’re pretty much the same thing when it comes to the preparation. It’s just the profiling of investors that you’re going to go after may be a little bit different.
One thing that is going to be very different on the pitch decks, for example, of the Seed Round and the Series A, is that on the Series A, you have product/market fit. You already have a clear validation and how the market is reacting toward your product or service. On the Seed Round, it’s very much all about the future and possibilities because you don’t have a lot to show because you’re still in the very early stages. On the Seed Round, you want to focus on what’s possible. Maybe you want to put more research into more data and perhaps reports on the trends in the market. While, on the Series A, what you’re focusing on is more on historical data, and interesting things, and accomplishments, and milestones that you have added.
For example, on a Seed Stage, you’re not going to have a lot of testimonials or customer reviews. On a Series A, you’re definitely going to have those, so you want to include those. Again, Seed: a lot of future and a lot of possibilities; Series A: there’s going to definitely be future and possibilities, but more of a focus on the historical data.
The Seed Round and the Series A: The Seed Round is going to happen 18 to 24 months before the Series A. One thing that could happen is that in 18 to 24 months, you’re not able to make enough progress in order to get to the Series A. One thing that could happen is that you may need to raise an internal round, and that is called a Bridge Round. That is when you grab money from existing investors in order to continue extending the amount of time that you have to execute so that you don’t run out of cash and to accomplish those milestones and those metrics that are going to get you to a Series A and to meet the expectations of those investors. If you need to raise a Bridge Round, don’t go to outside investors because they could view a Bridge Round from a negative connotation or perspective. Get that Bridge Round and that money in from existing investors to execute and deliver on your promise.
When it comes to terms, it’s very interesting how it’s going to be different on Seed Rounds and then also on Series A Rounds. On Seed Rounds, for the most part, it’s going to be convertible notes. Convertible notes, essentially, you’re going to be focusing on three things:
- Interest that you’re giving to the investors on the money that they’re giving you on a yearly basis.
- The discount rate that you’re applying on the valuation that you will be getting on your Series A, which is going to be basically equity, and there is going to be a price established on your business, so it’s a discount out of that, that they’re coming in.
- Then the valuation cap, which indirectly is a valuation.
On a Series A, it’s going to be more equity. It’s going to be more of a bunch of documents, typically, between five to six that you are signing, and where every single clause needs to be negotiated because one of those clauses could literally mean nothing to you today, but in five to seven years, it means getting you out of the business—getting kicked out of the business. So you want to be very careful.
And, obviously, legal fees are going to be more expensive, the equity round on the Series A versus the Seed Round because with a convertible note, you can literally get it done within a couple of weeks. It could be anywhere between $5,000 to $10,000 from a legal fees’ perspective, while the equity side is going to be just one month alone for the drafting. Perhaps there will be some negotiation, and then the fees are going to go anywhere between $15,000 to even $50,000, especially if there is a lot of negotiation and a lot of unsophisticated parties, the fees on the legal side could ramp up very quickly.
The reporting that happens after you raise a Seed and a Series A is also going to be different. For a Seed Round, you’re still in the very early stages, so typically the expectations from the investors are that you are sending them a newsletter or an update, maybe, every month, so they know what’s happening with the business. On those updates, you can talk about the team; you can talk about progress, milestones, revenues, metrics that you’ve achieved, maybe mentions made by the press. On the Series A, it could be once a quarter. Again, as you continue to expand and grow as a business and go from one financing cycle to another, there aren’t going to be so many different fires and things that happen so quickly like you might find in the earlier days, so it’s going to be evaluated and delayed a little bit more, the amount of touchpoints that you do with the investors.
So, hit a Like on this video. Also, leave a comment and let me know what you’re up to, and Subscribe to the channel so that you don’t miss out on all the videos that we’re rolling out every week. And if you’re raising money, send me an email at firstname.lastname@example.org. I would love to help out with your fundraising efforts. Thank you so much for watching.