Seed vs. Series A

by Jennifer Kiesewetter in July 27th, 2021

TLDR

  • You can fund your startup in a few ways: through personal savings, family and friend investments, bank loans, angel investors, or venture capital.
  • If you raise capital through investors, your startup will ideally progress through several investment stages, including seed, Series A, Series B, and Series C. Each round of investment will be higher than the previous round.
  • Seed funding is the earliest round of startup investment. Often, founders will seek funding from friends and family, angel investors, bank loans, or personal savings.  Because the startup is a younger company and hasn’t yet developed a strong track record, the seed round is considered high risk for investors.
  • In the seed round, expect to give 10-15% of your startup’s equity to your seed investors, which then dilutes the founders’ ownership as well.
  • After the seed round comes the Series A round of funding. In this stage, startups are still young and often still pre-revenue, but they’re ready for their next cash infusion, taking them to full launch. Series A has often been described as the “first round at which a valuation was assigned [to the startup] and the deal was funded by professional investors.”
  • To launch a Series A round of funding, the startup will announce that it’s open to Series A investors, providing them with a detailed business plan, current financial state, financial projections, and any other business or financial information relevant. Additionally, the startup must be priced, otherwise known as receiving its valuation.
  • Unlike a mature company, a startup ready for Series A (and a valuation) doesn’t have a track record fully supported by facts and figures, still carrying a higher investment risk. Because of this, investors look to other indicators of success, such as the quality of the management team, the size of the opportunity, a prototype, and a launch plan, such as a go-to-market strategy.
  • In exchange for this investment, your Series A investors will receive ownership of the company. In the Series A round, expect to give 15-25% of your startup’s equity to your investors, which then dilutes the founders’ ownership as well.
  • Startups that have completed their initial seed round may not be quite ready to pursue a Series A. Thus, they opt for a “seed+” round, also known as seed extension, seed2, pre-A, or early Series A.
  • At these earlier stages, valuations are often more of an art than a science, with nuances throughout. Whether you’re valuing a startup with no revenue or one with revenue but a short track record, investors must be comfortable with some level of uncertainty.

As a startup founder, you know that building your business is challenging. You’re wearing many hats—from developing and refining your product to creating a dynamic sales team to attracting and retaining top talent. And if that doesn’t keep you up at night, you’re also trying to get funding for your startup, often a daunting and confusing task.

You can fund your startup in a few ways: through personal savings, family and friend investments, bank loans, angel investors, or venture capital. If you raise money through investors, your startup will ideally progress through several investment stages, including seed, Series A, Series B, and Series C. Each round of investment will be higher than the previous round.

This article will de-mystify startup capital by focusing on the earlier rounds of investment funding: seed, seed plus, and Series A.

Startup Stages: Seed vs. Series A

First, let’s start with the seed round.

Seed

Seed funding is the earliest round of startup investment. Often, founders will seek funding from friends and family, angel investors, bank loans, or personal savings.  Because the startup is a younger company and hasn’t yet developed a strong track record, the seed round is considered high risk for investors. However, by investing at this early stage, investors can get ownership (or equity) in the company at its lowest valuation along with access to invest at later funding stages.

In the seed round, most startups have developed a product along with a go-to-market strategy but have little to no revenue. Receiving a seed investment will help them grow, build infrastructure, and gain traction in the market. However, investors are typically investing in the idea, the founder, and the story at this point in time.

Seed rounds often range between $10,000 and $2 million; however, seed round sizes have grown mightily over the past several years. According to a recent study by Wing Venture Capital, the median startup raised $3.9 million in seed capital in 2019, “up from $3.1M in 2018 and 3.9x more than the $1.0M of 2010.”

In the seed round, expect to give 10-15% of your startup’s equity to your seed investors, which then dilutes the founders’ ownership as well.

Now, let’s look at the next stage of funding—the Series A round.

Series A

After the seed round comes the Series A round of funding. In this stage, startups are still young and often still pre-revenue, but they’re ready for their next cash infusion, taking them to full launch. Series A has often been described as the “first round at which a valuation was assigned [to the startup] and the deal was funded by professional investors.”

Valuation

To launch a Series A round of funding, the startup will announce that it’s open to Series A investors, providing them with a detailed business plan, current financial state, financial projections, and any other business or financial information relevant. Additionally, the startup must be priced, otherwise known as receiving its valuation. But if a startup doesn’t have revenue (or very little), how do you determine its valuation?

Unlike a mature company, a startup ready for Series A (and a valuation) doesn’t have a track record fully supported by facts and figures, still carrying a higher investment risk. Because of this, investors look to other indicators of success, such as the quality of the management team, the size of the opportunity, a prototype, and a launch plan, such as a go-to-market strategy.

Several valuation methods have been created for startups, all of which you can use to calculate your company’s value. For example, the Berkus method examines five aspects of the startup, including concept, prototype, quality management, connections, and launch plan. Each of these five aspects is then ranked up to $500,000 each, with a total possible valuation of $2.5 million.

Here’s an illustration of this method.

Source.

This simple estimation of value may give you a benchmark, but it doesn’t consider other critical factors, such as the economy.

Size of Rounds

According to the Wing Venture Capital study mentioned above, Series A rounds have grown as well, but not as rapidly as seed rounds. For example, “[i]n 2019, the median Series A was $12.4M, up from 11.9M in 2018. While this is 2.5x bigger than the $5.1M of 2010, it represents a slower rate of growth than any year since a dip was recorded in 2016.” Most Series A investors expect high returns on their investment, such as a 200% return.

The Investment

With a Series A injection in cash, startups will have working capital for six to 18 months. The Series A investment can also be used to pay off any earlier seed investors.

However, remember that your Series A investors will receive ownership in the company in exchange for this investment. In the Series A round, expect to give 15-25% of your startup’s equity to your investors, which then dilutes the founders’ ownership as well.

Both common and preferred shares represent ownership in the startup, and both may pay dividends. Common stock carries voting rights which increase in proportion to the stock owned. Preferred stock does not grant voting rights.  Additionally, preferred shareholders have a greater claim to the startup’s income. So, preferred shareholders are paid dividends before common shareholders.

After Series A comes Series B and then Series C rounds, where the investments are larger as the startup continues to mature and build a track record.

How Common Is "Seed+" vs. Series A

When it comes to seed rounds, you may hear terms like “pre-seed,” “post-seed,” or “seed+.” Pre-seed rounds have no professional investors (i.e., institutional investors), and the investment is typically below $150,000. Startups pursuing this round usually have a viable proof of concept and are building a product that will satisfy a market need.

On the other hand, startups that have completed their initial seed round may not be quite ready to pursue a Series A. Thus, they opt for a “seed+” round, also known as seed extension, seed2, pre-A, or early Series A. No wonder investment rounds can be confusing.

There are many reasons why a startup may choose to raise multiple seed rounds.

First, with Series A investments continuing to grow in size, investors are demanding more from startups seeking these investments. Because of this, startups may find themselves forced to raise multiple seed rounds to better prepare for a future Series A.

Secondly, a startup may want to boost its valuation before committing to a Series A by raising additional seed money. This allows the startup to generate more sales and continue refining its product.

Finally, a startup may have missed hitting its goals and milestones associated with its seed financing. As such, to stay on track, it may require additional funding from a subsequent seed round, allowing it to better prepare for a future Series A.

Ranges for Valuations for Both

At these earlier stages, valuations are often more of an art than a science, with nuances throughout. Whether you’re valuing a startup with no revenue or one with revenue but a short track record, investors must be comfortable with some level of uncertainty.

When valuing an early-stage startup, founders can look to certain guiding principles. For example, you can look at comparable startups. However, because many startups are unique, you may have a difficult time finding comps. Certain law firms, like Cooley, publish quarterly venture capital reports reflecting price points on recent deals, allowing you to see valuation ranges for various startups.

Additionally, you can value your startup, as we discussed above, by analyzing the founder’s idea, the strength and experience of the management team, the size of the opportunity, the timing of the opportunity, and the go-to-market strategy. However, no matter how you look at it, it’s still an approximation of value at these earlier stages.

No matter if you’re at the pre-seed, seed, seed+, or Series A stage, you’ll need to understand your business in and out, being able to demonstrate how you’ll use the investment funds to grow your business. And, as with most business issues, it’s best to engage a professional to help you with the process. 

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