Think of your startup idea as a seed. The idea is a seed that needs to be planted, then watered and provided with all necessary nutrients for its growth. We talk about Series A Funding here.
What is Series A Funding and How it works?
Funding is a similar process. To avoid confusion, let us begin from scratch.
The startup idea is a seed. For it to grow, you need to dig a small hole to plant it in. That is “Pre-seed Funding.” The funding essential to help you make a comfortable place for the seed to grow in. A smaller prototype of the tree that you intend the seed to grow into. The initial amount of money that is needed to develop a prototype of the business you envision. This would require calculating the space the tree will need to grow, the number of workers to help you plant it, and the number of supplements it will need. In other words, it is pre-planning and proofreading your plan for the venture. This is the first step in the lifecycle of the startup, and at this stage, your seed. The pre-seed funding usually is to assemble from friends, family, a well-wisher, or the founder itself.
Now the prototype is ready. You know what type of tree you want and what aims you have for it. You have a plan prepared for your business. It is time to plant the seed, that will hopefully grow into a large business tree. Seed funding, to get the startup into its first pursuit. This step could be in the form of product development or research or even sample study. It is also a very delicate time for your seed. The startup is at its most crucial moment. Most startups run out of fuel at this point and fold. If your seed does not catch roots before the initial capital runs out, your soil will wear off. The seed funding at this stage usually comes from friends, family, investors, well-wishers, or the founder itself. This can also be pre-acquired assets of the founder or small personal loans.
Series A Funding
Now, your seed has been planted. It has been watered in the form of your seed funding. The seed has begun to take roots. The startup has reached the initial goals that had been set. These are as markers to see where the startup stands. These can be in the form of a number of employees, views, revenue, or any performance indicator. To help the process become faster and healthier, you need to provide the supplements necessary. This is to ensure more rapid growth.
Series A funding will be the first important and on a larger scale funding for the startup. That is what Series A Funding is and becomes necessary. The plan here is to become a bigger sapling, a bigger startup. The revenue earned is to invest in increasing revenue rates. The goal is to plan a model of a developing business, bigger and better than the current stage.
Since Series A funding will be the first significant investment in your startup, investors will be more critical of what they expect. The investors will not be looking for a great idea. The investors will not be looking for a high seed. They will be looking for a design that can become a great business with tremendous profit potential. They will be looking for a sapling that will grow a large tree and will bear great fruit. This can be also be the Anchor funding.
The ‘A’ in Series A funding stands for Anchor. The explanation to that is this will decide whether the startup has been anchored or not. This will determine whether your sapling will grow into a tree or get uproot. Since the investor acknowledges the risk involved in putting money in a startup as Series A funding, they confirm security through part ownership or stocks. If the venture fails, then there is some way for the investor to reclaim the money that he had invested as a Series A fund.
This capital usually comes from venture capitalists, and the popularity of equity funding is also gaining weight. This does not mean that well-wishers or surprise investors are out of the picture.
The plan at Series A Funding stage is to scale. The seed needs to become a sapling. The startup needs to become financially independent. This will be the first time that the startup will offer ownership, in part, to an outsider. This can be in multiple forms, but the most common is in the form of exchange of preferred stock in the business.
For example, Ashley opens a cake shop. She uses personal assets and loans to open the cake shop and now needs Series A Funding. Bob is a venture capitalist who gives her the capital to open two more shops in exchange for preferred stocks in the business. Ashley is giving Bob part ownership of her cake shop.
However, it is essential to hold on to your anchor investor in whichever form they might be. He will bring you Series A funding but can also cause a lot of loss. The trend of investors to back out begins with the anchor investor. Once the anchor investor has quit, the other investors start to lose faith and backout too. CB Insights states that only forty-six percent of firms make it past Series A Funding. If you reverse the situation, though, once you have an anchor investor, other investors will follow with less hesitation. Overall, you must acquire a strong anchor and hold onto them.
Let us hope that your sapling is deeply rooted and anchored by Series A Funding. The aim is that your sapling will grow large and bear a lot of fruit. Once the sapling has become a tree, it will be time for Series B Funding. When the startup starts earning profits and has had growth in consumers, research, it will need Series B funding. Congratulations, your tree is bearing fruits!