As soon as a start-up has picked up the wind and the product has been successfully launched on the market, the really high costs come to a start-up. Because now it’s time to grow and further develop the existing market. Because the proof-of-concept has been provided and this milestone signals to potential investors that the business model works. This criterion is a mandatory feature for most investment companies to invest in a start-up.
In the A-Series financing round, before contacting venture capital funds and investors, it pays off to take a good look at them in advance and to obtain as much information as possible. This article deals with the most important focal points of the investor approach and the associated documents.
What is A-Series Funding?
A-Series funding (also known as a Series A round or Series A funding) is one of the five possible stages in a startup’s fundraising process. In essence, the Series A round is the third tier of start-up funding and, in most cases, the first tier of venture capital funding.
Similar to seed funding, Series A funding is a type of equity-based funding. This means that a company secures the necessary capital from investors by selling its shares. In most cases, however, Series A funding comes with anti-dilution provisions. Startups typically issue preferred stock, which grants no voting rights to its owners.
At the same time, it is quite common for the startups to issue convertible preferred stock. These stocks offer investors the opportunity to convert their preferred stock into common stock at a predetermined future date. It should be noted that investor returns from Series A funding are lower than returns from seed funding.
In addition to more conventional methods, crowd investing can also be used in Series A funding.
Series A Funding Objectives
Series A financing primarily serves to ensure the further growth of a company. Common goals in Round A include reaching product development milestones and recruiting new talent for the workforce. At this stage of development, a company intends to continue growing its business in order to attract more investors for future rounds of funding. Exactly these steps should be included in the business plan creation .
In the Series A round, the largest investors are venture capital funds. Generally, these are companies that specialize in investing in early-stage companies. In general, capital is awarded to companies that are already generating sales but are still in the pre-profit phase.
Unlike seed capital, Series A funding follows a strictly formal approach.
Venture capitalists, representing the majority of investors in this funding round, are ready to complete the due diligence and evaluation process before making any investment decision. Thus, these processes start any substantial Series A funding.
The company valuation in the business plan for the A-Series financing
In contrast to the previous pre-seed phase, anyone who wants to acquire the coveted risk capital for the A-series financing for their start-up must further adjust the company’s valuation, and important formalities must also be observed in the application process.
Evaluating a startup is an essential part of Series A funding. Unlike seed-stage startups, companies looking to secure Series A capital can provide more information in the business plan that can be used to make informed investment decisions.
The objectives of the Series A fundraising appraisal include identifying and evaluating a company’s progress with its seed capital and the effectiveness of its management team. In addition, the evaluation process shows how well a company and its management use the available resources to generate profits in the future. Only when the due diligence and evaluation processes are complete do venture capitalists invest in a company.
So the business plan that can be financed should, in addition to the generally applicable formalities, also show all the necessary documents and information for an extensive due diligence check.
due diligence
This term has already been mentioned many times in this article and, in a figurative sense, this term means “due care required in traffic”. During the due diligence check, the start-ups in which investments are to be made are carefully analyzed with regard to tax, economic, financial and legal circumstances. The check usually includes sales figures, possible negative attributes (connections to white-collar crime, tax evasion and corruption) and company structures. This exam is essential for Series A funding and should therefore be well prepared.
In many cases, an extended due diligence check is carried out, which checks company databases, watch lists, PEP lists, press releases and sanctions lists.
On the one hand, these checks are required to protect investors and venture capital funds, and on the other hand there are many other reasons for this:
- Legal reasons: Protection against corruption and money laundering is very high on the list of reasons why due diligence is required when acquiring shares. International laws such as the UK Bribery Act, the US Foreign Corrupt Practices Act (FCPA) or the national GWG law.
- Economic reasons: Investors want to keep the risks for themselves and the investors as low as possible when acquiring shares.
- In order to protect the reputation: With investments in the millions, it must be ensured that the start-up in which the investment is to be made complies with ethical and legal standards in order not to risk any negative effects on the reputation of the venture capital fund.
- Avert financial consequences: If you work with business partners who are not legally correctly integrated , there can be extremely high penalties for everyone involved, which in turn can have a negative impact on the reputation of the investors.
Overview of due diligence report
The due diligence analysis process can be divided into three steps :
- Identification: In order to prepare for the first step of the examination, one should expect that important information will be requested from investors. For corporations, these are: information about the company (sales, legal form , organization chart), its shareholders, beneficiaries, board members, group structure, official documents, contracts and political relationships. In the case of individuals in society, this can also include proof of identity and sources of financing, and even political connections can be queried.
- Sanctions list check: In this second step, the aim is to check the start-up for possible criminal connections or actions. In this step, the following lists are compared with the data: sanctions lists, criminal prosecution lists, disqualification lists and PEP lists (politically exposed persons). In preparation for the exam, every business founder can certainly check their private circumstances and adjust them if necessary, but the hands of the start-up are usually tied when it comes to influencing this exam.
- Risk assessment: Finally, the information and data collected are summarized and evaluated in the development of a risk-based approach. If the test is positive, nothing stands in the way of the investment.
summary
In summary, in the third step of start-up financing, it is essential to deal with the subject of due diligence. In addition to the general chapters, the business plan should also devote a separate chapter to this topic . It is usually the case here that companies seek professional advice when they are about to acquire investors, so that avoidable mistakes when compiling the business plan relevant to financing, the associated financial planning and thus a probable rejection on the part of the investors can be avoided.
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