Mumbai/New Delhi: Entrepreneurs are encouraged to be hustlers. Interestingly, they don’t just create ideas but also terminologies.
As investors become more demanding, entrepreneurs and start-ups are increasingly turning to emergency financing which has been given a fancy name of Pre-Series A.
A Pre-Series A round, which has been very widely used in the start-up ecosystem for at least a couple of years now, is basically an intermediate round between a seed and Series A round.
However, over the past six to nine months many more start-ups have resorted to this bridge round, investors said.
The growing importance of Pre-Series A round can be linked with investors becoming cagey in pumping in money in start-ups with unproven business models.
Typically Series A funding tends to be in the range of $2 million to $10 million.
However due to a decline in the investment scenario many start-ups are taking longer to convince investors to take a punt on them, hence the need for a bridge or Pre-Series A round.
The size of Pre-Series A ranges from $500,000 to $2 million.
According to data from VCCEdge, while the first six months of 2015 saw 72 Series A deals worth $383 million being closed. Since July, Series A deals worth only $216 million were reported across 57 deals in 2015.
The report further said that even though venture capital deals have slowed, angels rounds have seen an uptake.
While the first six months saw $128 million worth of angel investments (across 271 deals), the July-December period witnessed $169.5 million worth of investments (across 336 deals).
The Pre-Series A rounds are usually led by venture capital firms and high net individuals who plan to participate in the follow-on rounds in a company.
A few times, even the existing investors including angels and seed stage venture capital funds pump in some money to boost their promising portfolio companies.
The Pre-Series A round acts more like buffer money being provided by investors. This money helps the companies with their immediate working capital requirements. Pre-Series A is also often linked with metrics.
Many a times, investors also promise their participation with a larger cheque in the Series A round if the start-ups are able to achieve a milestone in a specified period of time.
According to T.C. Meenakshisundaram, managing director of venture capital firm IDG Ventures India, Pre-Series A rounds are mostly raised as the start-ups do not have enough proof points to raise Series A round of funding.
“For example, if a SaaS (software as a service) company does not have a million dollar annual run rate, then Series A would be tough to raise. If a start-up is able to utilize the Pre-Series A round money in achieving the milestones needed by the investors, then they can attract investors for a Series A round,” he said.
Some also call Pre-Series A more cosmetic than anything else.
According to Avimukt Dar, partner, Indus Law, Pre-Series is very much like a seed round, however it is optically nicer as it builds an expectation that the company is not looking to simply bootstrap, the company is on its way to raise more capital.
Companies also avoid calling a small round as a Series A as it would affect its future funding prospects. So the better way is to cover it up by calling it a Pre-Series A.
“Historically Series A funding tends to be above $2 million. In such a scenario if any funding is below $2 million, the parties do not tend to report it as a Series A round as it isn’t significant enough and has a knock on effect on marketing their next round of funding. Typically Series B needs to be in double digits in terms of millions of dollars,” Dar said.