Understanding Series As
What they are and how they happen
Before diving into the strategy and tactics of raising a Series A, it’s important to understand what a Series A is and what it is not.
The A is fundamentally different than a seed in terms of round dynamics and the impact it has on to a business. Watching these differences play out over hundreds of rounds taught us something surprising: proactive founders should start planning for a Series A as soon as the seed round is closed.
The differences between Seeds and Series As
Series As differ from seed rounds in 5 key ways:
Series As usually require securing a lead investor. To complete a Series A, founders generally need to secure a large commitment from at least one investor. This investor - the lead - sets the terms, including the size of the round, the price, and the board structure. This dynamic changes the process of fundraising. In a seed round, smaller checks are a useful way to create fundraising momentum; the less space there is left in a round, the more pressure there is to commit capital. In a Series A, you need to focus on securing a lead investor first. Once the lead is in place, you can fill the rest of the round with smaller investors. The exception here is when you raise a syndicated round, which we’ll discuss later.
Series As are raised from a distinct set of investors. Though there still are hundreds of potential Series A lead investors, there are far fewer of them than angel and seed investors. These investors are usually institutional VCs (i.e. they invest on behalf of limited partners, and do so as a full-time job). They - usually - require a thorough diligence process before making a decision to invest. They also typically want to build relationships with founders before they invest.
Series As require handing over control in the form of a board seat (usually) and ownership of (on average) ~20% of your company to a single investor. While seed investors own equity, they have little control over a the decisions a founder makes. In contrast, Series A investors will have a say in your decisions for the duration of the company’s lifetime. This also means that Series A investors aren’t just investing capital - they’re investing time. They’re choosing to devote a chunk of their lives to you and your company for the next 10+ years. This, in conjunction with larger check sizes, raises the stakes of each investment made and therefore the bar for an investor to reach conviction. Each partner at a given fund typically leads ~1-3 As per year.
The Series A process requires more time. Building relationships takes time. Preparing materials takes time. Running the process itself takes time. Negotiating and closing take time. Founders have to account for these timelines when figuring out when to raise.
Series As (usually) require metrics as indicators of early product-market fit, whereas seed rounds are almost entirely based on story and founders. This means that investors will dig into metrics as part of the story of the company and through formal diligence. However, it’s important to note that there is no specific set of metrics or a magic number that will automatically generate a Series A term sheet. This is why the Series A is a unique middle ground between a seed and a B. We’ll talk more about this in future posts.
The three types of Series As
Series As happen when either 1) a founder goes out to pitch investors to secure an offer or 2) an investor proactively proposes an offer. There are three primary ways this unfolds:
1. Extreme growth
When a company experiences meteoric growth that is obvious, especially to outsiders, multiple investors will often compete to provide funding, even well before the founder is planning to fundraise. Historical examples include Facebook and Instagram. This situation is quite rare, and you typically already know you're in this category if investors are chasing you with term sheets.
2. Preemptive Funding
Occasionally, a venture investor that has an existing relationship with a founder/company offers funding terms before the founder is ready to start a formal process. This is known as "preemption." Getting preempted is relatively rare, but depends on the specific circumstances of market cycles and dynamics of a particular category or space (e.g. AI).
In a preemptive offer, an investor provides a term sheet without requiring the founder to go through the standard full pitch and diligence process. This is most likely to happen with an existing seed investor who has been tracking the business’ progress closely. Investors like to make preemptive offers because it it increases their chances of winning a competitive deal. By being the first offer in they: 1) create time pressure 2) create a 1:1 negotiating dynamic and 3) make the founder feel warm and fuzzy and excited about raising money.
Founders who aren’t prepared to deal with those dynamics get caught off guard and risk ending up in a suboptimal outcome. Even worse, founders often think they have a pre-emptive offer when they don’t - for instance when an investor makes a verbal offer. To clear up all confusion: an offer is only an offer if there’s a term sheet in your hand.
3. Process-Driven Fundraising
Finally, the majority of Series A rounds happen through a structured fundraising process initiated by the founder, on that founder’s timeline. This process involves creating investment materials, pitching to partners, going through due diligence, receiving and negotiating term sheets, and finally closing the round.
Conclusion
In almost all cases – even when your company is experiencing exponential growth – preparing for a Series A process is critical. Offers of any kind - preemptive or otherwise - don't materialize without work.
In this guide, we’ll help you understand the dynamics of fundraising and Series As. We’ll discuss how to lay the groundwork and structure a process, which starts with preparation after your seed round, in a way that maximizes leverage for the founder.