Series A Startup Funding - from Anguish to Accelerate

Seed funding has become the ‘participation award’ of startups. While getting started is easier than ever, ultimate success is tougher than ever.

There has never been a better time to start a new company.

It seems like almost any good idea crossing the floor can get Seed Funding. In fact, even really bad ideas often receive initial funding these days. The catalyst for this change is somewhat of a cultural shift where many diverse ideologies are coming together at the same time. A few basic examples include:

Shark Tank –
This popular series inspires people to pursue their dreams. Over time, many viewers have shifted their dreams to bypass the hard work of being the entrepreneur and moving straight to the seemingly cushy position of successful investor.

How “Shark Tank” Revealed the Important Difference Between Gross Profit Margin and Net Profit Margin
Crowdfunding –
Our research uncovered over 300 active crowdfunding platforms in the marketplace. I challenge you to come up with an idea that doesn’t fit into the sweet-spot for one of these fundraising engines.
Boomer Retirement –
The largest generation in history is moving into active retirement. This group is not ready to sit on the front porch swing as they begin their final descent. They want to do something new. Many are starting their own businesses while others are investing in the young whippersnappers.
Regulatory Changes –
Becoming an investor is easier than ever. Many have traditionally viewed startup investment as something only available to the upper echelon, but the lifting of restrictions has opened the door for many to get in on that elitist feeling. In some ways, people are seeing startup investment as the classier version of buying a lottery ticket.

The current swell has people like Y Combinator’s President, Sam Altman, saying, “seed money is so easy to raise in the current environment that founders assume they can just raise more money whenever they want.”¹

I have personally witnessed relatively quick Seed funding for concepts stage startups. A moment of intellectual pause on behalf of the new mass of investors would clearly scream that there is no path toward a return, much less the multi-X returns that serious Angels and VCs seek.

5 Steps from Concept to Startup

What an amazing time to start a business! Anything goes! This is great!…isn’t it?

The current startup environment reminds me of modern youth sports. The days of recognizing talent and hard work as a way to set yourself apart are diminishing. Parents and athletic clubs alike seek to shield fledgling athletes from the pain of defeat. We want every child to feel like a winner who’s dreams can come true (no matter how unrealistic). We prop up this misplaced confidence with useless accolades like participation awards. From the outside looking in, we all know these kids will face heartbreak sooner or later, yet we allow this mental misstep to continue.

In much the same way, Seed funding has become the “participation award” of startups.

For many, the reality check presents itself like a brick wall when they run out of that initial free-flowing cash and move to Series A startup funding. At that point, investors are of a different caliber. You have to prove your ideas. The path to a clear and substantial return must be significant. Due Diligence is demanding. Entrepreneurs are put to the test. However, with the massive influx of companies coming off Seed stage funding, most fail to raise the capital needed to move forward.

14 Types of Information Investors May Request as Part of their Due Diligence Checklist for Your Startup

This reality propels a new set of challenges to the serious entrepreneur seeking Series A startup funding.

All of the traditional challenges remain, but they are compounded by the fact that there are now 4 times as many start-ups seeking that next level of funding. And, while Seed funding has exploded, the amount of money funneling into the Series A stage has remained relatively steady. This means that successfully moving forward requires more than your “A” game. It requires clear focus and the ability to target the right investors at the right time. It also means that you need to understand what these investors are looking for and come to the table prepared to pass Due Diligence.

While getting started is easier than ever, ultimate success is tougher than ever.

If you are serious, I want you to succeed, and here’s why. I am an Angel investor trying to wade through the explosion of startup companies seeking next-level funding. In fact, every member of the FundingSage team is an Angel investor. Each of us has also been involved in multiple startup ventures. We’ve had many successes and have every intention of building on that success. We want to see great startups achieve bountifully because their success lends to our success.

Serious investors like ourselves are excited to back companies with a great team, a great plan, a great strategy, and a willingness to put in the sweat to make it happen. Sadly, we have found that many startups are unable to put a strategy together that allows them to prepare and target higher-level funding mechanisms effectively.

That’s why we created FundingSage. If you have what it takes, we want you to be successful – your success translates to our success. As Seneca said, “Luck is what happens when preparation meets opportunity,” – good luck.

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Matthew Cleek

Matthew Cleek is a serial entrepreneur and is a co-founder of FundingSage, which provides valuable information, tools and resources to entrepreneurs seeking to start, grow and fund a business. Matthew's business ventures include Intellithought, theEclassifieds, Spectrum20, Theme Spectrum and more.

Definitioner

Bounce Rate

Put

A contractual term/condition which provides the investor the option to compel the company to purchase their shares.⁶

Entrepreneur

A person who organizes and operates a business or businesses, taking on greater than normal financial risks to do so. Entrepreneurs are the founders of startups and are the people angel investors support.⁷

Funding

This term is used synonymously with the words “financing” and “capital.” It refers to the amount of money that is needed for a business endeavor. For example, a new business owner may seek a certain amount of funding for their startup company. This “raised” capital can be used to launch their endeavor as well as to sustain their company until monetary profit can be generated.⁴

Startup

A startup is a new business venture / enterprise in its initial or early stages of development. These stages include the concept, seed, early, growth and mezzanine stages.⁶

Series A

A company’s first significant round of venture funding (though angels often participate in this round).²

Seed Stage

The stage of a scalable startup immediately following the concept stage. In this stage, the entrepreneurs typically validate their product or service to the marketplace, develop their MVP, commence initial market testing and development, and begin development of their business model / go to market strategy. The first formal round of investment beyond friends and family typically occurs in this round with investment from super angels, angel groups and micro VCs.⁶

Seed Money

The initial round of capital for start-up companies, typically provided by angel investors through preferred stock or convertible bond type instruments.⁶

Seed Money (Seed Capital)

Seed Capital is the money used to purchase equity-based interest in a new or existing company. This seed capital is usually quite small because the venture is still in the idea or conceptual stage.⁵

Due Diligence

A process undertaken by potential investors — individuals or institutions — to analyze and assess the desirability, value, and potential of an investment opportunity.³
This is the process whereby individuals or groups of people conduct independent investigations regarding a particular matter. In the business world, investors conduct timely due diligence when inquiring about prospective investment endeavors. This may entail a background search of the company’s founders, review of the entrepreneur’s credit scores, and routine follow-up with references and associates, etc. New business owners, on the other hand, are encouraged to also conduct due diligence when finding a potential investor. Through due diligence, both the investor and entrepreneur has the opportunity to diligently analyze and assess each other for the potential of an investment opportunity and partnership.⁴
Due diligence is the process of investigation and evaluation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.⁵

Crowdfunding

“Crowdfunding” is the process of raising financial support for a venture via smaller amounts from many investors (“the crowd”), rather than the alternative pattern of larger amounts from a smaller number of supporters. Charities and philanthropies have traditionally employed both fundraising strategies (soliciting both the general populace, or crowd, as well as fewer wealthier donors), while businesses have usually taken the route involving fewer and larger supporters. Today’s internet has vastly increased the ability of fundraisers to communicate information, solicit and receive financial support from anyone on-line. Crowdfunding without the expectation of financial return, or with the promise of a specific good or service, are termed “donation-based” or “reward-based” crowdfunding, are in the nature of charitable solicitation or business marketing, and have never been illegal in the U.S. In contrast, soliciting funds in return for a ownership interest or expectation of repayment, are termed “equity-based” or “debt-based” crowdfunding (together grouped as “securities-based” crowdfunding), and have been until now governed (and effectively prevented) by federal and state securities law. One of the most significant parts (Title III) of the federal “Jumpstart Our Business Startups”, or JOBS Act of 2012 specifically enabled and legalized “security-based crowdfunding”, subject to a variety of regulations and restrictions.¹

Related Articles

Crowdfunding – The Most Usual Source of Startup Funding [Infographic]

5 Lessons on Startup Capital: Marathon Investments vs. Sprint Funding

Moving Series A Startup Funding from “Anguish” to “Accelerate”

Capital

Financial capital is a term that can refer to the money exchanged between entrepreneurs and investors during a business deal. Entrepreneurs need to raise capital for their startups while investors can provide them with the needed capital (or funding). Financial capital usually comes with interest, and new business owners can use their financial capital in purchasing real capital (or machinery or equipment) for their new business.⁴

Angel Investor

Once, an unrelated individual investing monies in a business venture, often later than founders, friends and family (the “3F’s”), but before larger corporate investors such as venture capitalists (“VC’s”). The term “angel” arose in the entertainment industry, where investors would bankroll a production for a share of the profits. Now, with wealthier individuals able to invest significant funds throughout the development of a company (so-called “super-angels”), and venture capitalists sometimes investing alongside and on the same terms as angels, a more modern definition is that “angels” write checks with their own money, while “VC’s” write checks with other people’s money (venture capitalists typically raise funds from investors called “limited partners” who do not actively participate in the fund’s investment decisions and operations, whereas the VC’s act as the “general partners” making the investment decisions and overseeing the invested companies.)

INFOGRAPHICS