Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about
what the difference is between Seed and Series A Rounds? Before we get started, make sure
that you hit that Subscribe button, and this way, you will never miss out on any of the
videos that we roll out every week. As a founder, as an entrepreneur, or the operator
of a business, especially when it’s a hypergrowth business, you’re going to be dealing with
those two rounds: Seed Round and Series A, and also the ones that come after the Series
A. As the company has a life cycle, it also has different financing cycles that go in
parallel. In today’s video, we’re going to be breaking it down for you, so you really
understand the difference between one and the other. So, without further ado, let’s
get into it. As a company, you’re going to have different
types of financing cycles. Everything starts with the Seed Round. Then, you’re going
to do the Series A. Then it’s going to be the Series B, and then it’s going to more
of the same all the way to the liquidity event, which is essential via an acquisition, an
IPO, or a secondary sell of shares where existing investors sell their shares to new investors
that want to come in. Remember that as the company matures, it will
go from one financing cycle to another financing cycle every 18 to 24 months where you’re
raising more money, and ideally, hopefully, at a large valuation. But that’s exactly
what you’re going to be encountering. Let’s get into discussing what the differences are
between the Seed and the Series A. The Seed Round: The Seed Round is the very
first round of financing that you’re going to be encountering. This is the round that
comes after the Friends and Family, which is the first initial pool of capital to get
going. Now, anything before a Series A, whether it’s a micro-seed, a pre-seed, or whatever
seed, it’s still a seed round. On a seed round, what you’re doing is you’re raising
an amount that is going to go toward meeting the expectations that you’re going to be
getting 18 to 24 months later. When you are at a Seed Round, 1) The investor
is going to expect that you have the founding team in place, ideally, people with credible
skill sets and expertise. 2) You have a roadmap for the next 18 to 24 months where you’re
showing them how you’re planning to execute and to deliver on your promise.
When it comes to the amounts, Seed Rounds typically tend to be anywhere between $200,000
all the way up to $2 million, which is typically the average around $2 million is what I’m
seeing on the East Coast and the West Coast in the U.S. Typically that is what you’re
looking for. On a Seed Round, the types of investors that you’re going to be bringing
in are going to be quite broad. That’s going to be angel investors, angel groups, micro-VCs,
and that could also be family offices. Now, let’s talk about the Series A. The
Series A is for the very first time and the round of financing where you’re going to
be encountering institutional investors like venture capital firms. Venture capital firms
are completely different from the investors that are mainly individuals that you’re
going to be encountering at a Seed Round because venture capital firms, the due diligence process
is going to be more extensive. They’re going to expect you to have validated
the business model, that there is product/market fit, and that you already have a clear understanding
of how money is coming in, how money is coming out, and how the full cycle continues. So,
if they give you $1, how many dollars can they take out? They want you to really have
a clear understanding of those metrics. In addition to the founding team, they’re
going to need to know that you have the right people seated in the right seats of the bus
when it comes to the team because, as the book, Good to Great says, “At the end of
the day, a startup is all about having the right people in the right seats of the bus
because if that’s the case, you will eventually get to the successful path.”
When it comes to the Series A, it’s very interesting because, here, you want to do
as much due diligence on the investor as much as they are doing on you. Here, you want to
go after investors that can add the following: Access to M&A opportunities
Access to talent Access to distribution like partnerships
Access to business development deals When it comes to preparing for a Seed Round
or perhaps a Series A Round of financing, the preparation is going to be the same because
those are rounds that, at the end of the day, they’re going to take you anywhere between
three to six months to complete from Point A to Point C. But the way that you’re going
to be thinking about those is first you need to prepare. That is creating your pitch deck,
creating the financial model. In the financial model, you’re going to be including the
valuation, the amount to raise, and the projections, where the money is, and how the company is
going to be performing over the course of time. On the pitch deck are 15 to 25 slides.
By the way, you can use the pitch deck template below that is for free that founders are using
to raise millions all over the world. In terms of preparation, it is probably going
to take you about a month or two. Then it’s going to be all about getting out there and
making sure that you have a good target list of investors that you can tackle on. You want
to go after the people that have the money for you. Those are people who have the right
type of investment thesis that would be excited to invest in a business like yours. The investment
thesis is all about the geographic location where you are, the segment that you’re in,
and also your financing cycle. Again, you’re not going to go for a Series
A investor when you’re at a Seed Stage. That’s a big no-no, so go after the investors
that can give you the money. That’s what it comes down to in preparing for a Seed Round
or for a Series A. They’re pretty much the same thing when it comes to the preparation.
It’s just the profiling of investors that you’re going to go after may be a little
bit different. One thing that is going to be very different
on the pitch decks, for example, of the Seed Round and the Series A, is that on the Series
A, you have product/market fit. You already have a clear validation and how the market
is reacting toward your product or service. On the Seed Round, it’s very much all about
the future and possibilities because you don’t have a lot to show because you’re still
in the very early stages. On the Seed Round, you want to focus on what’s possible. Maybe
you want to put more research into more data and perhaps reports on the trends in the market.
While, on the Series A, what you’re focusing on is more on historical data, and interesting
things, and accomplishments, and milestones that you have added.
For example, on a Seed Stage, you’re not going to have a lot of testimonials or customer
reviews. On a Series A, you’re definitely going to have those, so you want to include
those. Again, Seed: a lot of future and a lot of possibilities; Series A: there’s
going to definitely be future and possibilities, but more of a focus on the historical data.
The Seed Round and the Series A: The Seed Round is going to happen 18 to 24 months before
the Series A. One thing that could happen is that in 18 to 24 months, you’re not able
to make enough progress in order to get to the Series A. One thing that could happen
is that you may need to raise an internal round, and that is called a Bridge Round.
That is when you grab money from existing investors in order to continue extending the
amount of time that you have to execute so that you don’t run out of cash and to accomplish
those milestones and those metrics that are going to get you to a Series A and to meet
the expectations of those investors. If you need to raise a Bridge Round, don’t go to
outside investors because they could view a Bridge Round from a negative connotation
or perspective. Get that Bridge Round and that money in from existing investors to execute
and deliver on your promise. When it comes to terms, it’s very interesting
how it’s going to be different on Seed Rounds and then also on Series A Rounds. On Seed
Rounds, for the most part, it’s going to be convertible notes. Convertible notes, essentially,
you’re going to be focusing on three things: Interest that you’re giving to the investors
on the money that they’re giving you on a yearly basis.
The discount rate that you’re applying on the valuation that you will be getting on
your Series A, which is going to be basically equity, and there is going to be a price established
on your business, so it’s a discount out of that, that they’re coming in.
Then the valuation cap, which indirectly is a valuation.
On a Series A, it’s going to be more equity. It’s going to be more of a bunch of documents,
typically, between five to six that you are signing, and where every single clause needs
to be negotiated because one of those clauses could literally mean nothing to you today,
but in five to seven years, it means getting you out of the business—getting kicked out
of the business. So you want to be very careful. And, obviously, legal fees are going to be
more expensive, the equity round on the Series A versus the Seed Round because with a convertible
note, you can literally get it done within a couple of weeks. It could be anywhere between
$5,000 to $10,000 from a legal fees’ perspective, while the equity side is going to be just
one month alone for the drafting. Perhaps there will be some negotiation, and then the
fees are going to go anywhere between $15,000 to even $50,000, especially if there is a
lot of negotiation and a lot of unsophisticated parties, the fees on the legal side could
ramp up very quickly. The reporting that happens after you raise
a Seed and a Series A is also going to be different. For a Seed Round, you’re still
in the very early stages, so typically the expectations from the investors are that you
are sending them a newsletter or an update, maybe, every month, so they know what’s
happening with the business. On those updates, you can talk about the team; you can talk
about progress, milestones, revenues, metrics that you’ve achieved, maybe mentions made
by the press. On the Series A, it could be once a quarter. Again, as you continue to
expand and grow as a business and go from one financing cycle to another, there aren’t
going to be so many different fires and things that happen so quickly like you might find
in the earlier days, so it’s going to be evaluated and delayed a little bit more, the
amount of touchpoints that you do with the investors.
So, hit a Like on this video. Also, leave a comment and let me know what you’re up
to, and Subscribe to the channel so that you don’t miss out on all the videos that we’re
rolling out every week. And if you’re raising money, send me an email at alejandro@pantheraadvisors.com.
I would love to help out with your fundraising efforts. Thank you so much for watching.