One of the most important early rounds a company will raise is the Series A. It’s a major make-or-break moment for startups showing promise. While seed money is raised around your idea and your credibility as a founder, your Series A raise will be based on how your business model is actually working in the real world.

If you’ve grown your company from the seed stage and are thinking about that next cash infusion to fuel growth, these are the questions to ask yourself.

What Is Series A Funding?

Simply put, Series A funding is the second round of financing your startup will raise after the seed round, and usually the first round involving institutional investors like venture capitalists (VCs), though many businesses take an alternate funding route with options like equity crowdfunding.

Series A investors perform more diligence than investors at earlier stages and expect a substantial (often controlling) interest in the startup, in the form of common and/or preferred equity. Because startups at this stage are still overwhelmingly likely to fail, investors look for opportunities with high return potential to make up for the majority of failures in their portfolio.

When Should You Raise Series A Funding?

As Y Combinator points out, timing a Series A round is tough to figure out. There are no hard and fast rules about when you should seek Series A financing your company, but there are some key variables that go into an investor’s decision to provide it.

Revenue

The days of pre-revenue Series A rounds are coming to a close. These days, investors (whether experienced VCs or everyday investors in equity crowdfunding) will almost always require that startups have monetized their business model before they will consider investing in a Series A round.

While revenue is crucial, profitability is not a prerequisite (nor is it necessarily expected) at this early stage.

Product/Market Fit

Revenue, alone, isn’t enough. You must also demonstrate product/market fit – a term coined by legendary VC investor Marc Andreessen in a 2007 blog post, meaning “being in a good market with a product that can satisfy that market”.

If your product hasn’t found a consistent home within at least one customer segment, whatever revenue you may have generated here or there won’t impress a VC.

Growth Trajectory

Revenue isn’t the only thing your company needs in order to appeal to VCs. You need to show attractive growth projections to justify an increased valuation and imply a high potential for return on investment.

Prior Investment

Virtually no startup can raise a Series A without having raised at least one prior round of funding. As of 2018, startups raise an average of $5.6M prior to their Series A (per TechCrunch).

Investors are still wary at this early stage and like to see how effectively your company has utilized its prior funding – so spend your seed money wisely!

Why Should You Raise Series A Funding?

As with the factors that impact the timing of a Series A, what you should use your new stack of cash for will depend on your industry, goals and existing resources. However, most Series A money will be apportioned to the following areas:

Product Development

Having proven a marketable product, you will likely want to invest in developing new products or improving existing ones to create new revenue opportunities.

Inventory

Sometimes, the only thing holding a company back from growth is simply not having enough supply to meet demand. For startups that sell physical goods, Series A funding is often used to increase inventory.

Marketing

Once you’ve established a target audience for your products (product/market fit), you’ll want to expand your reach within that audience and tap into new ones with a multi-channel marketing strategy.

Whether you choose to aggressively spend on customer acquisition via paid growth channels like Facebook or Google ads, or play the long game by developing high-ROI organic strategies like content marketing and social media, you’ll need some kind of marketing budget to grow awareness and increase customer lifetime value.

Hiring

So who’s going to handle all of these new responsibilities? At this point, you and your initial team will likely have way too much on your plate to do it yourself. You’ll need to set aside a substantial amount of cash raised to bring top-tier talent on board.

How Much Should You Raise in Series A Funding?

As startup investing has heated up over the last decade, the size of venture rounds has increased. According to TechCrunch, the average Series A in 2018 weighed in at about $15.7M, which is more than the average size of a Series B in 2010!

Meanwhile, Fundz.net, a database of funded companies in the US, places the average Series A valuation at $22M in 2019.

These are big numbers, but bigger isn’t always better – how much you should raise (and at what valuation) depends on how much you need, what you need it for and how much equity you’re willing to cede. 

How Should You Raise Your Series A Funding?

As mentioned earlier, the Series A round is typically where institutional investors like VCs will first enter a startup’s cap table – but that doesn’t mean they’re the only investors in the round. 

And when it comes to raising money, not all investors are created equal. These are the major types of investors that may be involved in your Series A, and what makes them unique.

Venture Capital

Venture capitalists (VCs) are often the most important investors in your Series A. They are the most experienced type of investor at this stage and can offer strategic advantages and shared insights from having invested in many other early-stage companies. Because they invest larger amounts of capital, they will accordingly ask for a more substantial stake in exchange for their greater exposure to risk. 

Often, more than one VC will be involved in a Series A. In this case, one VC will proffer the most cash for the most equity – this is known as “leading the round”.

Existing Investors

Friends, family and angel investors involved in your previous rounds may wish to contribute additional capital at the new terms to avoid having their equity stakes diluted by new investors.

These are your tried and true supporters, the ones who have been with you from the early days. While they may not have the same strategic influence of institutional capital, they are often the most vocal and passionate champions of your business. Take care of the ones who took care of you by carving out room for them in subsequent fundraising rounds.

Equity Crowdfunding

Historically, startups had only the above options when it came to raising money beyond their seed round. More recently, equity crowdfunding platforms have given individual investors to access investment opportunities at the Series A stage and beyond, allowing startups to offer equity to a much larger audience of potential investors.

With this broader access to capital, you can focus less on chasing picky VCs (only 30% of companies that raise a Seed Round go on to raise a Series A) and often raise money for your startup much faster. But the benefits don’t end there – in fact, there are often many advantages to raising money via equity crowdfunding, like setting your own valuation for the round, building a vast network of investors that will champion your company, leveraging your crowdfunding campaign as a way to increase awareness for your brand and products, acquire new customers, and more.

Conclusion

While the timing, reasons and size of Series A funding are different for every startup, the Series A round is critical for taking any startup from proof of concept to legitimate market competitor. 

You can raise up to $50M on the StartEngine platform through a Reg A offering via our broker-dealer. We’ve helped over 325 companies raise capital from a community of over 200,000 prospective investors!

The post Series A Funding: 4 Big Questions About Raising Your Series A Round appeared first on StartEngine.

The following data covers Regulation Crowdfunding raises between May 16, 2016, and December 31, 2017. Data is sourced from all publicly disclosed Form C filings with the SEC, as well as public websites.

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Standard Analysis

Index: 859

In December, the Index grew 12%, countering suspicions that people don’t invest around the holidays.

Last time we saw the ball drop, in December of 2016, about $13M had been invested via Regulation Crowdfunding in the U.S. In 2017, that number grew by over 5X — totaling over $72M invested last year.

 

All in all, over $85.9M has been invested in Regulation Crowdfunding since inception.

Top Campaigns in December

Four companies enjoyed maximum raises in December, each reaching that $1.07M cap before the end of the month. One campaign, Waverly Labs, broke records on StartEngine by selling out in under 72 hours in November.

Campaigns must remain live for 21 days in Regulation Crowdfunding. Therefore, Waverly Labs continued to accept investments through December, qualifying it for this month’s count.

 

Gender

Gender data has remained consistent for the past few months, with female founders or founding teams with female members accounting for about 22% of campaigns.

This metric is consistent with dollar amounts raised as well. Last month,we reported 22% of total funds raised went to women or teams with female founders. That is to say, gender does not seem to affect the total amounts raised by campaigns.

 

Industry

This month, the Food & Beverage industry re-captured its share of the Reg CF industry, accounting for 30.3% of the market share, followed by Media & Entertainment at 14.8%, and Technology coming in a close third at 13.6%.

 

Type of Company

The mix of legal formation is showing a steady constant with 68% being Corporations and 32% Limited Liability Companies.

 

Type of Securities Offered

These numbers have remained consistent all year. Companies offering common shares are at 36% of the total raises, companies offering SAFE at 26%, and debt being the third most popular offering at 21%.

 

A handful of companies are now offering SAFTs or combinations of SAFTs and common stock. We look forward to tracking the progress of these offerings in 2018.

State of Operation

California closes out the year on top with a total of $33.8 million raised.Texas, New York, and Massachusetts follow in total amount raised, just as they have for the last six months.

For capital raised in December alone, new players Florida and Maryland made an appearance in the Top 5.

 

Funding Portals

Over the course of 2017 more and more funding portals launched campaigns, competing with the early front runner in the industry: Wefunder. By the end of 2017, StartEngine had closed a large gap. Other platforms like SeedInvest and Indiegogo saw continued growth as well.

 

Raising in Los Angeles

LA continues to be the county to watch. At $8.7 million raised since Reg CF’s inception, Silicon Beach has proven itself to be a leader in equity crowdfunding.

This month, there were more live campaigns from LA than ever before. However, the total capital raised saw a slight slow down.

Los Angeles County by the Numbers

35

campaigns in progress — up 5 from last month.

6

new campaigns submitted to the SEC in December. Down 5 from last month.

11

successful campaign closings in December.

~$480K

raised in December.

The post The StartEngine Index: December 2017 appeared first on StartEngine.

The following data covers Regulation Crowdfunding raises between May 16, 2016, and October 31, 2017. Data is sourced from all publicly disclosed Form C filings with the SEC, as well as public websites.

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Standard Analysis

Index: 686

The index increased by 6%. The forward momentum in the equity crowdfunding marketplace continues.

Total Capital Raised

Companies have raised just over $68M since the Reg CF inception. The net increase reported from September’s Index is +$1M.

However, the September Index (and all previous indices before that) accounted for all SEC submissions, not respective raises. Occasionally companies submit duplicative material to the SEC, or close campaigns without having disbursed on funds. This report has eliminated these discrepancies, and will continue to hold this standard in future indices.

Top Companies Raising in October

The following companies were top raisers in the month of October. Arbit, a polling app (Microventures) led the way, followed by Shark Wheel (StartEngine).

 

Gender

Last month we analyzed the gender of founders. The data in October has remained consistent, with at least 22% of founding teams including a female founder.

 

Industry

This month we looked at the industry of companies who raised capital in October. Distilleries and craft beer companies continue to be the industry receiving the most capital, at 16%, however, mobile apps are a very close second at 15% followed by media and entertainment at 9%.

 

Type of Company

The mix of legal formation is showing a steady constant with 69% being corporations and 30% Limited Liability Corporations.

 

Type of Securities Offered

Companies are increasingly offering common shares with 36% of the total raises compared to 31% last month. The second most popular offering is SAFE which increased to 26% from 23%. Debt is third at 21%.

 

Average Company Makeup

The average company has 5 employees and has been in business for 3 years. Average assets are $380K, average cash is $80K and revenue is $348K. The average company is not profitable with a loss of $237K. These findings reveal companies are startups looking to raise capital to accelerate growth.

State of Operation

Companies in California raised the most money in October with $1.9M, which is 38% of the total raised. Second is Maryland with $712K.

Since inception, California accounts for 41% of all capital raised. Second is Texas with 14% and New York third at 6%.

 

County of Operation

Los Angeles has risen this month to be the county that has raised the largest amount of capital with 9% share. Second is Travis County in Texas with 8%.

 

Funding Portals

In October, Wefunder and StartEngine together helped companies to raise over a million.

 

Wefunder is still the largest funding portal with a 37% market share followed by StartEngine at 23%, a slight increase from last month.

 

Raising in Los Angeles

Los Angeles continues to be the most popular place to own a company and raise through Regulation Crowdfunding. In October, over $600K was raised for these companies, up slightly from last month, and above all other counties in the nation.

Additionally, more campaigns began in October than the previous month, and most all of them are still kicking.

 

Los Angeles County by the Numbers

24

campaigns in progress — up 7 from last month.

8

new campaigns submitted to the SEC in October.

0

successful closes in September. They’re all still up!

~$661K

raised in October.

Industry in Los Angeles

Usually an entertainment town, October had LA-based tech companies taking the top spot in SoCal.

 

The post The StartEngine Index: October 2017 appeared first on StartEngine.