Entrepreneurial Basics from Hiruy Amanuel: What Is the Difference Between a Seed and Series A Round?
In the early stages of your new venture, you may need to raise capital from investors. As you prepare to seek funding, you will likely encounter the phrases “seed funding round’’ and “Series A.” While both types of funding are considered stepping stones for your startup, understanding the difference between the two is essential. In the article below, Hiruy Amanuel explains the vital differences between these two types of funding and provides some tips for choosing the right one for your startup.
What Is a Seed Round?
The phrase “seed round” refers to a financing round designed to raise initial capital for your new business. As the name implies, investors are planting a seed, hoping it will grow into something profitable. Seed rounds occur before the market for your product is thoroughly hashed out.
Many times, a seed round is raised on a convertible note. This is due to the inherent difficulty associated with setting specific valuations on pre-market ventures. However, later seed rounds may include set pricing. Startups may require several seed rounds to get their project off the ground.
What Is a Series A Round?
Unlike seed rounds, Series A is focused on optimizing your user base, improving product offerings, or speeding up the growth of your organization. Series A funding can only take place after you have developed a proven track record of success. This success is measured in sales, revenue, and other traditional metrics.
Financial backers that participate in the Series A round are often referred to as venture capitalists. They are seeking to gain equity in your company and obtain ongoing returns on their investments. If your company is ever liquidated, Series A investors will be the first to receive assets.
Before starting a Series A round, you will need a comprehensive business model that will generate long-term profits. Investors are looking for organizations with great ideas and a strong market strategy.
Which Option Is Right for a New Startup?
If your new venture is in its infancy, then seed funding is the ideal solution. Most of the time, seed funding is provided by a diverse group of investors. While seed funding may not raise as much as Series A, it allows more investors to get involved.
Seed funding also gives you ample time to refine your product and business model. During seed funding, potential investors do not expect you to have a finalized market strategy. Instead, they are looking for entrepreneurs with a great idea and a passion for their products or services.
Seed rounds are also a great place to start because of the built-in flexibility that they offer. As noted above, most seed rounds rely on convertible notes. By using these notes, you will not have to determine an exact valuation of the company during the pre-market phase. Your valuation will be determined after you have measurable data, such as during Series A fundraising.
With that said, you can choose to forego seed funding and jump straight to the Series A round. However, if you do this, it is essential that you have a comprehensive market strategy, data to support your valuation, and a strong product before seeking out Series A investments.
About Hiruy Amanuel
Hiruy Amanuel is a passionate philanthropist who has focused his efforts on the Horn of Africa. He has made substantial investments in several educational and technological initiatives throughout the sub-region. Amanuel hopes to drive the rapid development of groundbreaking technologies throughout East Africa by increasing access to quality education and technological resources.
