In the Finnish growth company market, there has been extensive reporting recently about the declining availability of funding and the stagnation of the growth funding boom seen in previous years. It's also widely known that a significant portion of growth companies either go bankrupt or fail to meet their objectives because the first major funding round – Series A – doesn’t materialize. Until that point, growth companies can often sustain themselves with funding from founders, angel investors, and public grants. This raises the question: what are the most common pitfalls in executing a Series A funding round, and how can a company maximize its chances of success? Let’s explore these themes from the perspective of a CFO.
Product-Market Fit – or Lack Thereof
One of the most common reasons a larger funding round fails is the lack of product-market fit. In Finland, the typical amount raised during a Series A round ranges between €2–10 million, which translates to an approximate company valuation of €5–30 million. Such a valuation cannot be justified unless there is clear evidence of demand for the product or service being sold, along with proof that the company’s sales model is functional and scalable.
In practice, this means the company must demonstrate recurring revenue to show that the product sells and customers continue their subscriptions. Usually, trial orders, pilot projects, customer promises, and a promising sales funnel are not enough. These are not indicators of a functional and scalable sales model. Series A funding is not primarily intended for product development or initiating sales activities; these are expected to have been addressed in earlier funding rounds.
A Distorted Cap Table
This is quite common in corporate spin-offs and companies where multiple early funding rounds have significantly diluted ownership among investors. Venture capital investors in a Series A round want to ensure that the founders remain significantly involved and motivated for the company's success post-round. After a Series A round, the operationally active founders should still hold a substantial ownership stake (approximately 50%). Otherwise, the funding round might fail solely due to this issue.
A distorted ownership structure can be partially corrected through stock option programs and directed share issues, but this can be a difficult pill for other existing shareholders to swallow.
Team, Product, Investor Profile, and/or Valuation Narrative Mismatch
Investors often seek specific profiles for their target companies, and this may not always be apparent if it’s not explicitly stated on their website or if thorough research hasn’t been conducted. For instance, there may be industry restrictions, or the investor’s portfolio might already include a company with a competing solution, preventing them from investing. Alternatively, there may simply be no chemistry between the investor and the founding team.
If you’ve reached the stage where valuation negotiations with investors begin, you’re already far along in the funding process. At this point, it’s essential to present a credible financial and funding plan for the coming years. A financial plan demonstrates the founder’s understanding of the key metrics affecting the business and establishes credibility regarding financial acumen. It should also justify the scale of funding sought, the company’s valuation, and the runway until the next funding round. Meanwhile, the funding plan should outline future funding scenarios and explain why additional rounds might still be necessary.
Due Diligence
Whether it’s financial, legal, intellectual property-related, or commercial due diligence, potential operational skeletons in the closet often come to light at this stage.
How to Improve the Likelihood of Success in a Series A Round?
- Be Realistic. Executing a Series A round typically takes at least six months. One of the first questions asked, beyond those about the product, team, and problem-solving approach, will be about sales and revenue figures. If this question already makes you break out in a cold sweat, consider exploring bridge financing options or other means to extend your cash runway until you can demonstrate the aforementioned product-market fit.
- Business Metrics. Don’t include metrics in investor materials just because “it’s expected.” The company must live and breathe these business metrics, and this should be evident in the company culture. Start implementing metrics early on in the organization and use them to guide your business decisions.
- Thorough Preparation. Conduct your own internal due diligence—either independently or with the help of external experts—to ensure negotiations don’t fall apart at this stage. Ensure you have a solid financial and funding plan as part of your investor presentation. Address any ownership distortions before the funding round, or prepare to propose measures to correct them during the round.
- Do Your Homework on Investor Profiles. Critically analyze potential investors and shortlist those whose profiles align best with your company. Investor discussions are also a significant time investment for the company, so eliminating unnecessary conversations benefits everyone.
A Series A funding round is not just an opportunity to secure growth capital but also a critical milestone that demonstrates a company’s maturity and credibility. Proper preparation not only increases the likelihood of securing funding but also strengthens the foundation for long-term success. From a CFO’s perspective, the core of preparation lies in meticulously crafted financial and funding plans, realistic goals, and ensuring the alignment of the team, product, and investor narrative. When the groundwork is done thoroughly, funding negotiations become an opportunity to build trust and establish long-term partnerships with investors.
If you want to ensure your company is fully prepared for a successful Series A, contact us. Our experts are here to help you navigate the process and maximize your chances of success.
Published 15.01.2025