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Deciphering the ‘Series A’ Code: The Holy Grail For Early-Stage Companies

Deciphering the ‘Series A’ Code: The Holy Grail For Early-Stage Companies

One of the most critical milestones for a startup is successfully raising Series A funding. More than 50% of Series A startups became successful businesses, according to data. On the other hand, the failure rate for pre-seed and seed-stage enterprises is relatively high, at 80%.  

After establishing a track record, companies seek Series A capital to expand their user base and product offerings. A Series A round, on average, offers a firm up to two years of runway to build its product, staff, and begin executing on its go-to-market plan.

Given our focus on SaaS, we examined 200+ Series A-funded Indian SaaS startups and asked the following questions:

  1. What was the total  capital raised by firms before raising Series A?
  2. Since their founding year and first cheque raise, how long has it taken these firms to  raise Series A?
  3. How many investment rounds did these firms go through before Series A?
  4. Are there any noticeable patterns in the measures mentioned above over time?
  5. Who are the most active Series A investors in SaaS?

Please note that the data used for analysis is from Tracxn, and we have analysed data of 200+ startups raising Series A between 2010 to 2020. Also, we have defined Series A as funding received by a company when the amount exceeds USD 4 million. We see founders with stellar backgrounds capable of raising significantly more even at a very early stage. However, this assumption comes from keeping historical trends in check and barring some outliers.

Series A Funding – An Inquiry

 Series A fundraise signals an indirect validation of a company’s business idea, scalability, and execution capabilities from a large institutional investor. It’s also a flywheel for the next stage of their development. The company can now gear towards expansion, as the core of the company is established.

Series A rounds have grown in size and are now taking place earlier in a company’s lifecycle. The demands on firms attempting to raise their Series A have grown as well.Some companies go through multiple small intermediary  rounds post seed raise and hence it is vital to gear all these fundraising efforts with Series A in mind.

Over the last couple of years, we’ve made some important observations:

  • Creating a niche:

As problem statements grow more niche with digital transformation, SaaS players have the opportunity to create a whole new category. Creating vertical SaaS or point solutions or building for workflows and integration can help a SaaS offering embed itself deeply into the customer’s core business.

  • Water, water everywhere…

With an increase of Micro VC’s, there is a marked increase in the availability and readiness of VC funding. Data shows that for every dollar invested, 80 dollars in VC funding was available. Entrepreneurs must look beyond the cheque and find the proper match (i.e. expertise, linkages, the ability to enable follow-on financing etc.) early in the journey.

  • The Trifecta

A company can get to Series A faster by focusing gradually on three critical areas – adopting a robust sales flywheel model, building a skilled team, and working closely with customers to improvise product and achieve product market fit.

Our study of the data set threw up a few interesting trends:

  • Investment Interest in SaaS companies:

The number of startups raising Series A  is growing year on year which also signals an increasing interest in SaaS from investors. The Covid-impacted year of 2020 saw a 35-40% surge in the number of startups raising Series A. .

  • Firms are reaching Series A faster: 

The average capital raised by companies before Series A in 2019, was 43% less than in 2015. There has been a decrease of 75% in time taken to reach Series A since the company’s inception and a reduction of 60% from the time they raised their first cheque. Clearly, enterprises are reaching Series A earlier thanks to proper planning and metric-driven execution.

  • The “Multiple” Seed Round Trend

While companies still raise Angel and Seed rounds before raising Series A, there are several bridge rounds raised in between. We might witness a change in approach towards  Series A funding, both from founders and funders.

Our observations have been derived from the data analysed for the 200 plus startups. To understand the nuances of our findings, here is a snapshot of our in-depth exploration through various verticals.

Increased Investment in SaaS Startups:

Venture investments are evolving rapidly which is driven by the widening availability of capital at seed stages. More and more startups raise seed rounds, the overall chances of startups reaching Series A will continue to improve. 

  • SaaS firms have increased from 3,000 in 2014 to 10,000+ in 2020.
  • The number of deals in the Indian SaaS business has increased from 24 in 2009 to 169 in 2019.

Reaching Series A faster : 

There has been a decline recently in the number of rounds before raising Series A as more founders directly approach the seed round. However, it would be interesting to watch how bridge rounds (Pre-Seed, Pre-Series A) might evolve.

Overall, a company’s road to Series A has become shorter, including the Seed to Series A, as the journey to achieving product-market fit, and establishing GTM9 is becoming efficient.

The number of years to receive Series A funding has dropped by 60% compared to 5 years ago.

Consumption of Seed Capital until Raising Series A:

Companies are gradually consuming less capital at the seed stages (i.e. pre-seed, seed, seed plus) before reaching Series A. The following findings are a signal of achieving Series A faster than before.

  •  In 2019, the average capital raised before Series A was 43 per cent lower than in 2015.
  • A gradual decline in average capital raised, 20% from 2018 to 2019.

The median time it takes to raise Series A since the conception of the startup has decreased by 75% in 2018 compared to 2014. Thus, We can anticipate a further fall in the median ages of firms raising capital after Series A funding. 

Bottomline

The previous ARR benchmark for Series A was USD 1 million. When profitability and exit became a worry, Series A investors raised their benchmarks and dynamics have shifted in the last few years. Series A investors are prepared to invest in firms with ARRs as low as USD 500k to get ahead of the round and assure their participation. Your potential to crack Series A relies heavily on your capacity to grow. A USD 500k ARR firm with a 20% MoM MRR growth rate is significantly more appealing than a USD 1m ARR company with a 5% MoM MRR growth rate.

Founders who raise less capital (a runway of fewer than 24 months) cannot adequately fund their growth and are under pressure to run out of capital. This has a spiralling impact on growth and the ability to attract Series A. Things seldom go as planned: earnings fall short, and costs exceed expected amounts.

Startup fundraising activities are an essential aspect of ensuring business success. Understanding the scenario today will put you in a better position to face the challenges of Series A fundraising. 

By : Saurabh Lahoti and Navjeet Kumar
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