Stephen Johnson: Why Series A Funding is the Most Pivotal Phase

Introduction

For companies pursuing a VC-backed fundraising journey, the Series A investment is arguably the most pivotal phase for determining what scale the company can and will get to. For those seeking to pursue a big outcome, it’s the last chance you have to fundamentally “figure things out” and find (what appears to be) product/market fit. For Series B and beyond, investors want evidence you’ve found it.

But what does a Series A funding round really mean? It’s easy to look at outlier events over the past few years (see 1-year old Mistral AI raising a $113m seed in June 2023, $415m series A in December 2023, and a $640m series B in June 2024) and think these names don’t really count for much. But for the majority of the start-up and scale-up ecosystem, they still provide a helpful framework for determining where a company is in its journey and where it’s intending to go.

The world doesn’t need any more VC blog posts, but this one will hopefully be helpful in digging into what Series A is for the vast majority of companies; what investors tend to look for; how to prepare; what people get wrong; and what you should be aiming to achieve with the investment.

Understanding Series A Funding

The majority of venture capital funds are focused on particular stages in the fundraising journey (Seed, A, B etc.). This enables them to refine how they evaluate opportunities to make better investment decisions, as well as build an ecosystem of relationships (advisers, operating partners, follow-on VC funds) that help the companies they invest in to succeed. Funds who focus on specific sectors (e.g. software, Fintech, life sciences etc.) catalyse this even further.

Series A is usually the first significant round of venture capital financing, with the typical fundraise ranging from £3m-£15m, with the associated equity dilution of 10%-30%. It is also usually when investment comes from an institutional fund, rather than family and friends, angels, family offices etc. which are more common at Pre-Seed and Seed. The growth and direction of the company is typically still heavily reliant on the Founder(s) but there is now a real company established, with more fully formed people infrastructure in both developing the product/service and in go-to-market/distribution. It isn’t entirely predictable or repeatable yet, but there is evidence of success outside of relying on the Founder(s) black book/past relationships for winning customers.

Am I a Series A ready company?

In our experience, companies that succeed in raising a Series A share some the following traits:

• The CEO has clarity on the long-term vision, strategy, execution plans and associated value milestones for the company.
• They are in the early stages of assembling an executive team capable of delivering on these milestones.
• The company has a refined product or service offering that is usable by their target customers, and offers substantial benefit over existing solutions.
• They have an ideal customer profile (ICP); know how customers derive value from the product; and how value will be captured through pricing.
• There is a large enough market opportunity for the value proposition to build a substantial business (we’ll come back to this point below). This is evidenced by bottom-up market sizing analysis based on realistic pricing assumptions and analysis of the number of prospective customers (see definitions of TAM, SAM and SOM).
• There is building evidence of market traction – either customers using or paying for the product or service. Real revenue is the best form of this but it will depend based on the sector.
• There is early evidence of the company being able to acquire, onboard and retain customers, whilst doing so profitably on a profitable unit economic basis. This means the economics of the business model at scale make sense.

Where this really differs to earlier and later stage funding rounds:

• Seed – requires less market validation and the company is usually earlier in developing and refining the product or service offering. Fundamentally this stage is all about backing a Founder (or Founders) working on building a compelling solution to a big problem.
• Series B – needs more evidence of market traction/revenue and have proven capable of growing quickly whilst demonstrating strong unit economics. There’s evidence of an expansive market opportunity, and ideally scope to build out further products and services. Getting to this point is often the target objective of series A funding.

How should I prepare for Series A?

Approach conversations with investors as you would conversations with your customers – seek to solve their problems for them. Almost all VC’s primary “problem” is to generate outsized returns for their investors based on the agreed investment strategy (their “investment mandate”). Therefore your focus should be on explaining how your company can help them do that. Have 100% clarity of where you are going to take the company, and how why it will be valuable when you get there. The less that is built on hope value, the better. Good investors should reciprocate in treating you like a customer too: seeking to help you solve your problems too, both pre and post-investment.

Be aware that investors will evaluate your company through two lenses – the business case and the investment case:

Company valuation is far too big a topic for a blog post, but all investors will look at the fully-diluted post-money valuation on this front (pre-money valuation + investment amount) to reverse engineer their anticipated returns based on a series of potential outcomes. They will also factor in future funding rounds, including any further participation they might make and any equity dilution they might incur. These return scenarios will range from achieving the “shoot for the moon” goal to total failure, but across all scenarios the risk adjusted return needs to make sense for them.

What do Founders tend to get wrong when raising a series A investment?

Below are some of the more common things we see founders “get wrong” – where funds don’t invest and the Founder could have done something to prevent it:

• Lack of clarity over future value milestones beyond just an ambitious financial forecast. Series A requires a good handle on how you will deliver the growth plan, based on thorough unit economic and financial calculations of what funding inputs will generate what revenue outputs (or alternative milestones to revenue e.g. FDA approval and reimbursement in pharma and medical devices, technology readiness level (TRL) in manufacturing). This includes the business model being economically viable. A common example would be using a sales-led motion to sell a low cost software product. If a sales rep can’t deliver 4-5x their on-target earnings in new bookings, the business model is very unlikely to work. Be clear on your base case plan and then have some upside “moonshot” initiatives.
• Comparing the UK venture capital market with the US equivalent. The US has a population of c. 5x the UK which alone presents a bigger market opportunity for companies. B2B customers are generally more willing to adopt new products, particularly within software, and are willing to spend more in the process. In general, salaries (as at the time of writing) are also much higher. The US also benefits from the world’s deepest and most mature venture capital ecosystem, which benefits founders and VCs themselves (particularly with follow-on funding rounds). These variables all lead to pros and cons for UK vs. US founders, but what is for sure is they are not the same markets.
• The investment case doesn’t make sense, usually based on the expected entry valuation relative to the risk adjusted outcome. Founders hear of other companies achieving high valuation multiples in a fundraise and assume their company can achieve the same, however every company and funding round is unique. Fundamentally the prize you’re going after needs to be big enough (through refined analysis of what your true serviceable obtainable market is), and the investor needs to believe you can capture it. The more evidence you have of your ability to get there quickly – existing revenue scale and current growth rate – the more attractive the business will appear and the higher the price. If you’re planning to raise further funding, the Series A valuation shouldn’t be prohibitively high that a Series B investor can’t make at least a 5-10x return on their investment. It can help to think a few steps ahead rather than maximising in the here and now. Fundamentally as with anything, companies are always worth what someone is willing to pay.

What are the typical objectives of a series-A round?

To grow the company to something that is worth more! The future ambitions of the company will determine what this means in detail. Many will seek to aggressively raise further funding rounds (series B, C+ etc.) if the ambition is to build a company of major scale. Others may prefer optionality and will instead seek to reach breakeven, perhaps accepting a lower growth rate, but only raise further growth capital if they so wish. To illustrate, below are two hypothetical scenarios from a series A round:

• Efficiency Software Inc. – raised a £6m series A round, was at £2.5m annual recurring revenue (ARR) having grown 100% year-on-year (YoY) at the time of investment, burning £200k/month in losses. Achieved £6m ARR 2 years later and was still growing revenue at 50% YoY, and was cash flow break even.
• To the Moon Software Ltd. – raised a £15m series A round, was at £2.5m ARR having grown 500% YoY at the time of investment, burning £350k/month in losses. Achieved £8m ARR 12 months later and was still growing revenue at 300% YoY, but was still burning £700k/month in losses.

Company B will almost certainly be worth substantially more than company A at this point due to the exceptional growth rate (VC is all about growth), but there is still a lot more risk to the Founders and existing investors given the company has no choice but to raise more funding to keep the dream alive. Any investor coming in at that point will expect to make a substantial return on their money, which sets expectations about what the company needs to achieve going forwards. Company A is still growing and should continue to grow into a valuable business, and benefits from optionality over whether or not they raise further funding. But it is much more unlikely that this company will grow into a truly substantial business in the near term.

Neither approach is right or wrong. Different funds have different appetites towards these types of investments – one is higher risk/higher reward than the other. What is most important is finding an investor that aligns with what you as the Founder (and the rest of your shareholders, board, team) want to do. Again this topic deserves it’s own blog to help Founders figure this out.

Wrap-up

Raising a series A should be the transformative step that enables a start-up to become a scale-up. There are a lot of variables at play, but the most important point to take away is go into the process with a full understanding of your business, vision, strategy and plans; and during the process seek to find an investor who is fully aligned with investing in that and can help along the way. It will no doubt take more time and energy than you expect, but when you find an investor you click with and have the capital in the bank to invest, it will be worth it.

Stephen Johnson is a seasoned investment professional with extensive experience in venture capital and private equity. Currently at Mercia Asset Management PLC, he specializes in supporting early-stage and scale-up businesses across the UK. Stephen is passionate about helping founders navigate the complexities of fundraising and growth strategy. He holds a degree from Loughborough University and is known for his hands-on approach to guiding startups through the investment landscape.