Venture capital is the choice of funding for an increasing number of startup companies. This type of funding is provided to businesses in rounds. The first round of financing is known as seed capital, which is used to launch a new company. The next round is known as series A funding, which is provided in many instances as preferred stock. Series A funding tends to occur when the company is generating some revenue from operation of the business, but is not generating net profits. At the point that series A funding is provided, a high level of risk is commonly involved because the company has not proven that it can generate and sustain a profit margin. The venture capitalist, or angel investor, willingly accepts those risks and provides the funding needed by the startup company in exchange for a percentage of ownership of the company and a percentage of future profits.
Additional financing may be required, in which case subsequent rounds of financing may be required. These additional rounds of financing are issued in the form of preferred stock called series B, series C, and so on. The additional series of financing typically alters the claim of the investor to future profits of the company. Each round of funding requires a change to the amount of profits to which the investor is entitled. Series A funding is unique in that it is issued in the beginning stage of a company, the time when the company is most vulnerable. It is intended to fund a company for the first few months to the first few years as it develops its products, hire and train its staff, secures its equipment, performs the initial marketing and research and other various business operations performed by a new business. Since venture capital funding requires a large legal expense, angel investors tend to provide series A funding to companies that require a very large funding package over $1 million.
Series A funding is mostly reserved for specific fields, such as computers, technology, oil exploration, and other high risk fields. Venture capitalists will invest in fields that will yield a high profit margin for the long-term. Every stage of financing, from seed money to series A funding to series D funding will require a well-constructed business plan. The business plan will detail the structure, mission, and financial objectives of the business. The company seeking series A funding will be prudent to include information on its management staff, as venture capitalists will consider the knowledge and experience of the company seeking funding in the decision to grant the funding.