Financial Rounds from Seed to Series A
Sometimes my clients think about funding as a one-off event. They cumulate in one unique transaction all the funding related to a long-term growing project. In contrast I point out the importance of the funding life cycle and the associated benefits by cutting the financial needs in phases.
The nature of investors differs according to the stage and maturity of the business. Actually, asking seed money to a VC will receive a “no” answer “Sorry too Early-Stage businesses for us” with low chances of success. An excess of capital injected at the seed stage with low business valuation would be dilutive.
The Business Angel and The VC attitude differs as they are looking at two different thesis. The BA is typically risk-taker and a business men expert of specific business, the VC is an institution that work more on hard evidence fact and numbers and prefers to invest at a more mature stage based on documentation.
The Funding timeline as per Chart4 could be anything below 12 months, being 6 months closing a good performance.
The funding life cycle
The funding cycle of a business typically refers to the stages that a business goes through to raise and manage the capital it needs to operate and grow. The cycle typically includes the seed stage, the series A, B up to the exit:
The seed stage is the earliest stage of funding, where a startup is typically pre-product and pre-revenue. Seed funding can come from friends and family, angel investors, or seed-stage venture capital firms.
The seed helps the startup to develop its product and prove the concept, while the following Series A round helps the startup scale the business expanding its the customer base.
The Series A round typically occurs after a startup has achieved some level of traction and is looking to scale. Series A funding can come from venture capital firms and other institutional investors.
Series B and later rounds occur as a startup continues to scale and mature. These rounds typically involve larger amounts of funding and can help to achieve a dominant position in its market. Series C and later funding can come from institutional investors, private equity firms, and even public markets through an initial public offering (IPO).
I my experience of Financial Adviser, it’s worth noting that not all startups go through all of these funding stages, and some may go through them in a different order or at different times, depending on their specific needs and circumstances. Additionally, some startups may choose to bootstrap or self-fund their growth instead of raising external financing.
Investors' attitudes towards startups can vary depending on the stage of funding, with different priorities and expectations at the seed and Series A stages. Here are some of the key differences in investor attitudes.
Seed-stage investors generally have a higher risk tolerance than Series A investors. This is because startups at this stage are often pre-revenue and have yet to establish a track record of success. Series A investors Focus on Traction see a clear path to revenue and growth, as well as a strong understanding of the market and competition.
At the seed stage, investors tend to focus on the founding team and their ability to execute on their vision. Investors want to see a strong and experienced team that has a clear understanding of the market and the problem they're trying to solve.
Seed-stage investors typically make smaller investments than Series A investors, but they may also provide more hands-on support and guidance to help the startup succeed.
At the Series A stage, investors tend to conduct more thorough due diligence on the startup and its team, looking at metrics such as customer acquisition costs, customer retention, and revenue growth.
Series A investors typically make larger investments than seed-stage investors, but they may also expect a larger equity stake and more control over the startup's operations.
Overall and summarised in chart2, while both seed and Series A investors are looking for high-growth startups with strong teams and compelling ideas, their attitudes and priorities can differ based on the stage of funding and the level of risk involved.
Investors look at different things when evaluating a startup for a seed round versus a Series A round. Here are some of the key factors that investors typically consider at each stage:
Investors look for a strong team with a diverse set of skills and experience that can execute on the startup's vision.
Investors want to see a clear, compelling, and innovative idea that addresses a real need in the market.
Investors evaluate the size and potential of the target market and the startup's ability to capture a meaningful share of it.
While not always necessary at the seed stage, investors may be impressed by early customer feedback, pilot programs, or other signs of validation for the startup's idea.
Investors look for startups with a product or service that can scale quickly and cost-effectively.
Series A Round:
At the Series A stage, investors want to see evidence of traction and momentum, such as a growing customer base, repeat customers, and positive revenue trends.
Investors expect the startup to have a clear understanding of the market opportunity and to be targeting a large and growing market.
Investors want to see a sustainable business model that can generate positive cash flow and profitability in the long term.
Investors evaluate the competitive landscape and the startup's ability to differentiate itself and gain a competitive advantage.
Investors look for a strong, cohesive team that can work together to execute on the company's strategy and vision, and a culture that fosters innovation and growth.
As summarised in Chart3, investors in both seed and Series A rounds are looking for startups with a strong team, a clear and innovative idea, and a large market opportunity, but the emphasis on traction and scalability increases as the startup progresses from seed to Series A.
Mario is a seasoned finance executive, who served as CFO for fire & security, food, energy and clean-tech global companies. He has turn-around experience and managed to re-finance growing businesses.
Mario is the Managing Partner at TML Venture Ltd. and supports companies in finding tailor-made investment solutions. His industry focus is on renewable technology, energy and food companies.