Surviving the hardships of bootstrapping and raising seed capital is only the beginning of the long, and often difficult, road known as early-stage investment. After that, entrepreneurs must gear up for Series A funding, one of the more significant rounds of venture capital financing.

Investors noted that this is the time when entrepreneurs have to step up their game. According to Tarek Amin, founder of Dubai Angel Investors and an angel investor himself: “If you thought raising a seed round was tough in MENA, brace yourself for Series A.”

That’s because “investor expectations are much higher in this round, especially if they are institutional investors with clear mandates and fiduciary duties to their limited partners.”

How much money to ask

Yousef Hammad, managing partner at BECO Capital, agreed.

“Series A should have proven product-market fit. They’re no longer testing. They’re looking for investment purely to scale. All the dynamics should be there: the team, licensing, technology. You can tweak as you go, but typically, Series A is growth time,” he said.

Series A funds in the region average between USD 2 million and USD 3 million.

“A good amount to reach for, is how much you need for 18 to 24 months. That’s the standard round rate,” he advised, adding that start-ups can speed up closing the round by ensuring the business’ legal structures are in order.

How much equity to give

The percentage of equity your willing to part with depends on your company’s valuation. Across the start-up world, there appears to be consensus that equity dilution for a Series A round often range between 20% and 30%.

But before you sign away part of your ownership, create a funding roadmap, which will give you an idea on the number of financing rounds you’ll potentially need as your business grows. This will also help you plan equity dilution. Remember that giving away a large chunk of your business early in the funding game may leave you with little or nothing to give to succeeding investors, should you wish to raise more funds down the line.

Consider the Startup Economics calculator, which its developer – New York-based finance technology company SmartAsset – claims will “help you understand how different funding events will affect you and your investors over time, and at exit”.

When to raise Series A funding

If your start-up has gained some traction, demand for your product or service is on the up, and there is a growing need to expand your team, operations and offerings, then raising Series A funding is right for you.

Having this capital, after you’ve exhausted early-stage funding, will help you scale up your business and explore its market potential.

How to impress investors

One way to boost your prospects of attracting investors and receiving funding is by joining an accelerator program.

Nour Halabi, investment and portfolio manager at Turn8, a UAE-based venture fund with an accelerator program, said: “As the name suggests, we accelerate an entrepreneur’s journey. We help by bringing investors to the entrepreneurs very early on. We’re putting them in front of a lot more corporates and people to test their product than they would by themselves.”

With the help of accelerators, start-ups in the early product stage can work with more developers, go to market sooner, and use customer feedback to pivot.

Recently, Turn8 has set up a fund to provide winners seed to Series A funding after they have completed the program. According to Halabi, giving that larger ticket offers a vote of confidence to investors.

 

When it comes to pitching, preparation is key. Hammad from BECO Capital pointed out a big mistake entrepreneurs do when pitching.

“They don’t do their homework. They don’t know who we are or what our portfolio companies are. Sometimes we get companies that pitch to us and we have a competitor in the portfolio. So they’ll be sharing information that they probably shouldn’t. They should know upfront that we have a conflict of interest, so they’re wasting their time.”

The right way to do it, he said, was to “approach funding as you approach sales” and know your investors fully. He also recommended having at least two types of investors, one for growth and the other for industry expertise.

“It’s important for entrepreneurs to know their numbers and business landscape,” said Amin of Dubai Angel Investors.

For him, showing progress is vital. Some considerations still stand as with raising seed capital: product-market fit, clear KPIs, and a good team. However, “the difference is, now you have history to showcase how you used the money raised from the seed round. You can clearly identify both your customer acquisition cost and customer lifetime value… and you can show how your business will scale.”

To prepare your numbers, Halabi recommended using tracking tools to keep your books in order.

“Find a platform that will manage and track your KPIs on a very regular basis. I use Angeloop and Gust, one serves as your metrics and the other as your data room. Angeloop shows your latest traction and it’s up-to-date for any shareholders, investors, and potential investors to see. Gust shows your pitch deck and your team,” he explained.

Finally, perhaps one of the most overlooked aspects of raising funds is the importance of building relationships, even before talking business or writing cheques.  

“It is important for the entrepreneur to realize that they are dealing with a person that they need to connect with,” Amin said.

Halabi added: “If you’re raising money, you need to sustain a relationship with investors. Email them monthly, just drop them a little note. Don’t ask them for money, but just send them an update. Make them feel that you want to talk to them… Investment is a waiting game.”

© Accelerate SME 2018