Raising a Series A round used to be a victory lap for startups. Thanks to Softbank, it's become one of the most competitive rounds with the highest stakes.
- Mega-funds like Softbank's billion-dollar Vision Fund are pressuring early-stage firms to make bigger deals with bigger returns, several investors told Business Insider, which increases the competition among a handful of firms competing for Series A deals.
- Many investors pointed out that taking institutional funding for Series A comes with a certain set of expectations that founders might not be aware of, and so they struggle to meet those expectations once the round has closed.
- "The Series A is becoming professionalized," Sridhar Tayur, a professor at Carnegie Mellon University's Tepper School of Business, told Business Insider.
- Notion, a productivity startup popular among venture investors, made waves in July when it apparently skipped over a traditional Series A in favor of individual investors in an uncommon $10 million angel round. It's the latest example of a buzzy startup passing up traditional funding in favor of angel investors.
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Closing a Series A funding round has always been seen as something of a graduation for Silicon Valley startups.
At that point, the founder has probably found a business model, and hired some of her first employees - what was once just an idea is turning into an organization that somewhat resembles a real company.
But, in true Silicon Valley fashion, graduation is starting to lose some of its luster for founders hoping to move fast and break things. The Series A round, historically a smaller round to help take a company through its first pang of growing pains, is now a major fundraising event in its own right, as even young startups cash checks worth hundreds of millions of dollars.
"The Series A is becoming professionalized," Sridhar Tayur, a professor at Carnegie Mellon University's Tepper School of Business, told Business Insider.
And the trend has an instigator: mega-funds like Softbank's infamous $100 billion Vision Fund, which hasn't hesitated to write massive Series A checks like its $1.15 billion investment in Chinese Ping An Healthcare Management, or the $300 million it put into US-based robotics startup Automation Anywhere.
Tayur explained that Softbank's massive Vision Fund has started to pressure early-stage investors to make bigger bets, earlier than they might have otherwise.
With the likes of Softbank making nine-digit investments in early-stage startups, founders are taking more money, attached to higher valuations. But those higher valuations also come with higher expectations, several investors we spoke to pointed out - nobody invests that much money without looking for a sizable return.
"If you know what you are doing and are ready to get on the treadmill, it's fine, but once you take institutional money, you are on the clock," Tayur said. "A VC wants a return in a timely manner, so the minute they put money in, the clock starts for them and then the entrepreneur."
Under pressure
There's a lot of mystery that an go into a Series A round, several investors told Business Insider.
Founders and investors have a mutual interest in the future of a startup, but it's hard for each to assess the other. A newer startup may not have enough data to prove to investors that it has a bright future ahead, and first-time founders may not have the experience to accurately and responsibly vet would-be VCs.
"We are often the first partner for the companies we invest in," Greylock partner Sarah Guo told Business Insider. "There won't be traction, data, other investors or other validation at that early of a stage."
Some founders might also find the process disorienting. Before the Series A round, many startups survive on angel or seed investments - smaller sums of cash that traditionally don't come with huge chunks of ownership, meaning more freedom for the founders. This means that Series A rounds can come as something of a shock, as founders have to give up a considerable chunk of equity to investors, and the control that comes with it.
"Two of my friends that just went through their Series A were concerned about losing control," Defy.vc partner Brian Rothenberg told Business Insider. "They've spent the last few years building their baby and now they have to contend with a board member. It's the first step of relinquishing that control, and that's scary."
How founders can protect themselves
Still, there are steps a founder can take to make sure they're not biting off more than they can chew with a Series A round.
Many founders are looking to the Series A to give their company credibility, and can easily be persuaded to sign their lives away to get a big-name investor on board. If a small company is able to score a major VC firm early on in the company's history, the thinking goes, it becomes that much easier to attract even more prominent investors later on.
A founder needs to be careful about what they offer to investors, says Adam Struck, founder and managing partner of Struck Capital. He said that founders need to consider what their cap tables look like before starting Series A conversations to avoid overpromising ownership in their company.
"They end up agreeing to terms that make it difficult to raise a Series A when they should be creating a precedent for their company," Struck said. "If you give people crazy coverage or shares or liquidation preferences, you complicated your cap table and put yourself into a position that makes it harder for you to close the Series A."
An alternative route
So while it's arguably never been easier for a young company with some traction to raise a jumbo-size Series A round, the headaches attached to that money are actually causing some startups to look for alternatives.
Case in point: Notion, a productivity startup popular among venture investors, made waves in July when it said that it had raised $10 million, not in a Series A round raised from traditional venture capital firms, but rather as the result of several smaller investments from a lineup of individual angel investors.
The startup, which is now valued at $800 million, wasn't forced into skipping the traditional venture funding route - in fact, some of Silicon Valley's biggest venture firms were reportedly knocking down Notion's door to get in on the round. It just actively decided that it didn't need the stress that comes with taking more VC money.
"We're not anti-VC," Notion CEO Ivan Zhao told Business Insider in February. "It's more about helping us focus on product and less on meetings."
To that point, the investors we spoke with said that control and focus are going to be big sticking points for startup founders. There's no shortage of investor money to be found, as evidenced by Softbank and its monster rounds, so would-be VCs have to prove to a founder that they bring more to the table than just a check and a meeting to attend.
"If you're an entrepreneur and you're taking the time to meet with someone, you should get value out of them," Defy.vc founder and partner Trae Vassallo told Business Insider. "Every touch with someone you have should bring value, so that's what we try to do. We want to prove our value."