Statistics show that there are thousands of new entrepreneurs in India every year who are looking to raise investment whether it’s initial capital to validate the product or a highly competitive series A round. The key factor on which investments depend is the “right valuation”. The right valuation is counterintuitive because it does not necessarily mean the highest rupee value and the smallest equity percentage for a new investor. The right valuation accurately reflects milestones achieved by the startup while at the same time reflecting on the future performance of the company as well.
What is the Seed round?
This is the first type of investment round for the startup. It is a preliminary investment stage which is geared towards helping startup founders validate their product and set up a reasonable market bandwidth for themselves. A seed round majorly focuses on three key things:
- Product and Market identification: An entrepreneur must have an idea about the type of product and service they are planning to offer to the market. While working on the product or service, the entrepreneur must have an idea of the market segment that the product is planning to tap. At this stage a reasonable amount of research should be carried out with respect to available marketplaces, understanding the competition and how best to sell a product or service within that segment.
- Geography: Post identifying the market for the product or service it is necessary to identify special areas to kick start piloting the product or service. It may be helpful to conduct market research to clearly define these areas.
- Team Building: At this stage of investment most entrepreneurs focus their attention on the third key variant that is building the team needed in order to bring the right expertise to launch the product or service.
Scenario – This year has seen 435 angel and seed transactions so far, translating to about USD 244.6 million (INR 1,627.26 crore), down almost 35% from the same period last year. Compared with 2015, angel and seed deals this year have dropped by more than 46% in terms of value. (Source – VCCEdge.)
What is Series A round?
Series A is the first significant round of venture capital financing for a startup. The name refers to the class of preferred stock sold to investors in exchange for their investment. It is usually the first series of stock after the common stock and common stock options issued to company founders, employees, friends and family and angel investors. At this juncture most startups have a strong defined idea of what the central goal is behind any product or service and may even have launched them commercially.
The reason behind raising series A investment:
- Ability to scale faster with larger partners and more cash.
- Increased notoriety, prestige, and name recognition within the community.
Scenario – Series-A investments have dropped by about 30% to USD 492.6 million, across 133 deals, as compared with 2016, highlighting the continuing cautiousness exhibited by early-stage investors in the country’s startup ecosystem. (Source – VCCEdge)
Conclusion- The most important factor of valuation is that it should be low enough to leave room for future rounds and high enough so meaningful acquirers are not discouraged. The pressure to perfect product-market fit and build a scalable marketing model that comes along with a Series A is too intense for most early-stage startups. The idea is to take short steps and solidify the company’s base. If a seed round signifies planting the tree and rooting the company with a strong foundation, a series A signifies sprouting branches.