A Round Financing
Refers to a startup's third round of raising money. In this round, they seek out funding from venture capitalists or private equity investors.
A Round Financing Details
Startups are new types of companies fostered by the growing need to innovate and provide jobs and revenue through entrepreneurship. These companies are different from previous types of companies in that they use previously untapped technology or entirely new methods to provide services. They could also produce a brand new product that solves a new problem or an old problem but in a unique manner.
Startups have become the newest fad in business as people can now start their own innovative companies without the hurdles experienced by old companies. Governments also support startups since they boost economies by providing jobs and revenue. However, due to the risks these startups undertake, they require new funding models and A Round Financing is one of them.
When Venture Capital (VC) firms ascertain their interest in funding the firm, they will offer the startup a term sheet that contains conditions needed for the funds to be unlocked. The terms also include the share amounts awarded to the investment firm in return for the cash given. The key conditions include:
- Income generation - The company must be generating some income, although it does not have to be profitable.
- Product-market fit - The company must have found the right product-market fit for their product.
- Complete product - The company needs to have a genuine complete product/service it provides to its customers. They can reproduce and make changes to the product as customers give recommendations, but there should be a product available.
- Proven Value and Interest - the product has to be valuable to its users, and there needs to be considerable interest generated from consumers. This is important since a product that adds value but a consumer doesn't want is useless.
Example of A Round Financing
Suppose a startup named ABC has created a viable product with a ready go-to-market strategy. They've already gone through pre-seed and seed financing. During the pre-seed financing stage, ABC's founders presented the idea, a business plan, and execution strategy to investors who provided a tiny amount of funds to create an MVP (Minimum Viable Product). During seed financing, they presented their idea, the MVP, and the tiny amount of interest/sales they have generated from the masses to investors once again. Investors gauged the promise of the product's success and provided even more funds for iteration, improvement, and research. (Seed money often does not exceed $500,000.)
ABC's product is in demand, but the founders need capital to expand existing operations to meet demand capacity. For A round financing, they will prepare a solid pitch deck and approach well-established, large VC firms that can help them grow and ask for funds to scale. If their data and growth projections are attractive, these VC firms will fund them. ABC will use the cash to hire talent and expand their real estate. They may also use the funding to acquire other startups that might increase the overall value proposition of the main product the company offers.
Significance of A Round Financing
Unlike older companies, startups cannot acquire funds from old-school funding institutions like banks. Their new models mean they are susceptible to higher risks, and banks cannot guarantee that the startup will pay them back. Thus the need for financing rounds.
Funding rounds provide startups with the capital they need to undertake high-risk operations. Investors involved are on board with this type of investment since even though it is a high risk, it can and mostly brings high returns relative to the risk they undertake. Examples of case studies include Amazon, which was started with only $250,000. It has turned into a behemoth worth $1 trillion. Facebook, too, started with very little and is now worth about $500 billion.