The Numbers Behind Seed And Series A Rounds of Funding
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The Numbers Behind a Seed and Series A Round of Funding
Hi, I'm Katie. Today, we are going to talk about the numbers behind a Seed and Series A round of funding. What we're going to go over is what does Seed and Series A mean, how much are companies raising, why it's important to raise the right amount, and how to calculate just how much you need. What's in a name? The name of your round sends a message to investors about the stage of your company. A Series Seed Round of funding is an early stage round and seed investors invest in people and ideas. That means they're investing in the team, they believe in the team, and they believe in the team's vision for their company. Seed stage startups have some level of profit. Maybe you have a demo, maybe you have a prototype. You have something that you can show investors, so they can get a good understanding about what your product actually is. Seed rounds are meant to use the investment to iron out the kinks of business models and get product-market fit. You know you have product-market fit when you can consistently go to the same target customer and get them to continuously sign up. Seed investors usually invest up to $2M and some seed investors require a board seat. What's a Series A round of funding? Series A investors invest in people, ideas and traction. That means your company's a little farther along than the seed and they want to see that someone is willing to pay for your product. Series A startups already have product-market fit and proven systems that will allow you to multiply revenue within the next 18 months. That means that your proven systems are either sales or marketing, and all you have to do is spend a little bit more money on those things and you'll be able to consistently get new customers. Series A is usually between $3M and $6M, and lead investors always want a board seat. That means once we get to it a Series A round of funding, your company becomes a little more formal. You're going to have quarterly board meetings and your investors which are now your board members, they're going to be approving your budget and the overall strategic direction of the company. How much is everyone raising? I did an analysis of public information from the SEC to see just how much early stage companies were raising in 2017. I looked at California and New York because those are the states with the most amount of equity investment, and what I found was for seed stage rounds of funding, they're getting between $100K and $7M. But really the average in the median is really around $2M. You can know if you are looking to reach the raise a seed round, $2M is the sweet spot. Series A, they're missing a little bit more because they're a little further along. Between half a million and $50M. But I want to stop for a second and talk about the $50M, so $50M is way too much. You're probably not going to get $50M for a Series A round of funding. I was only able to find two companies that raised $50M in the early stages. You can look at between $5M and $8M as a good benchmark for Series A. Why is it important to raise the right amount? I think what we need to understand here is what is the objective of an early stage round of funding. What it is, is you want to get to a particular milestone that could be add features to your product, you could want to get to X and revenue or X number of customers. Whatever it is that you set as your milestone, it needs to be something you can achieve within the next year and a half. It is not to get to cash flow positive. If you're able to build a financial model that gets you to cash flow positive from a seed or Series A round of funding, either you don't have a business idea, that's for VC investors because the idea is not big enough, or you underestimated your expenses. You need to go back to the drawing board. Is it possible to raise too much? Absolutely. Why? Because first of all, you're going to spend all the money you raised within the next two years. Investors do not invest in companies to let them have cash on hand in the bank. They wanted to go towards building the company as fast as possible. Also, the amount you raise determines your valuation. You don't want a very high valuation in the early days especially when you don't even have revenue or customers. What if we don't raise enough? I think this is pretty obvious to everyone, but the worst-case scenario is your current investors don't want to put in. You can't get new investors because they don't want to invest because your current investors aren't investing, you can run out of money and you have to close the doors. How much do you really need? Here, now, you can go to the spreadsheet and download the spreadsheet. There are instructions on how to fill it out. Go ahead, fill it out, and come back to the video. So you want to raise enough money to take you 18 to 24 months. You have to have your goal. You have to have reached your goal within the next 12 to 18 months. I know that there's a six-month difference there and it's because you need to plan to have at least six months from going out to raise to cash in the bank. It takes just that long. It takes 30 days just to do from turn sheet to cash in the bank. So, what does your spreadsheet look like? If you're cash flow positive between 18 to 24 months, you need to go back to the drawing board because that is not the objective of a VC-backed company, either your expenses are off or your goal wasn't big enough. And also, another important fact about your financials is your profit and loss statement is broken down to three categories. We have General Administrative (G&A), R&D, and Sales and Market (S&M). General Administrative are all those expenses that don't actually add up to building the company, so it may be a bookkeeper, an office manager, office expenses, HR, stuff like that. In the early days, you want to be spending your money on R&D, so building the product that could be engineering, design, whatever it is that builds your product. And Sales and Marketing, because you need to be going out to the market and getting them to buy your stuff.
In summary, the name of your round signals to the market your stage of the company. You need to raise enough money for 18 to 24 months of runway. Don't raise too much and make sure the breakdown of your expenses are mostly in R&D, and Sales and Marketing. Don't put too much in General Administrative. Just a little bit about me, I'm a consulting VP of finance. I have helped companies raise close to $200M over the last eight years in equity funding. And I currently work with startups in the early stages to help them get to the next round of funding, so in terms of finance, financial modeling. And I grew up in New Jersey. I've lived in New York City for 16 years and now I currently live in Lisbon, Portugal with my husband, my son, and my yorkiepoo. If you liked this video, go ahead and share it with your friends or let me know in the comments. Thanks so much. Bye!
For more insight or help managing startup’s finances contact me at me (at) katiebronnenkant.com.