BUSINESS

Rounds Of Investment Funding Explained

Finding funding to start your business is common for startups these days, and if you are new to all of this, hearing terms like funding rounds, Series C funding, etc. can appear hazy. Understanding what these terms mean shouldn’t be part of your worries while trying to secure funding for your dream business. Here are what these terms mean.

Pre-seed Round: Previously Seed rounds used to be the first type of fundraising round available to founders. But increased competition in the marketplace, huge growth in the number of startups has changed this. The required conditions to qualify for traditional seed funding have now upped.

A typical pre-seed round sees a founding team (often pre-product) receive a small investment to :hit one or more of the milestones they’ll need to ready themselves for “true” seed investment: from hiring a critical team member to developing a prototype product.

Pre-seed round is usually led by many of the same investors that lead seed rounds. The pre-seed financing is often used to bridge the gap to the next round.

Funding at this stage could come from early-stage angels, startup accelerators, or possibly family and friends. Funding is typically about a $1 million on the average, and companies are valued between $1-3 million.

Seed: Capital from a seed round often fuels a startup’s move beyond its founding team, funds product development, and in some cases, even facilitates early revenue generation. Investors give seed capital if they see strong pointers that suggest the business will begin to record month-on-month revenue in the short-term, paving the way for later fundraising.

Traditionally, seed rounds were the reserve of angel investors, but the proliferation of cash-rich VC funds and a huge range of startups to invest in has attracted more venture capital firms into seed round investment creating a big variance in seed sizes. The median angel-funded seed size is around $150,000, but the median VC-led seed size is closer to $1.5 million. The involvement of VCs leads to seed rounds ten times larger than those led by angels — with the largest seed round in 2015 a staggering $10 million.

In addition, seed round funding could also come from startup accelerators. Funds raised typically average about $1.7 million, and startups are valued between $3-6 million.

Series A: This the next level of funding and it’s all about revenue growth. By this point, a startup is expected to have clear and growing evidence of Product/Market Fit, translating into significant revenue growth from new customers and increasing ARPA (Average Revenue per Account).

It’s also here that SaaS marketing and sales become more important. Until this point, growth has often been driven by a single (and not always scalable) channel. To keep growing at a rapid rate, it’s necessary to develop new sales and marketing processes, identify new channels, and get to grips with your ideal customer.

Angels (often referred to as “super” angels) will sometimes invest in Series A rounds, but it’s usually the venture capital organizations that dictate this round. Average funding for this round is about $10.5 million, and companies value between $10-15 million.

Series B: In Series B, investors are looking for the next stage of growth. This round of investment might allow a startup to make expansive hires (across business development, strategic accounts, marketing and customer success), expand into different market segments or experiment with different revenue streams, and possibly, even buy-out businesses that offer a competitive advantage.

VCs and late-stage VCs provide funds in this round which averages about $24.9 million, and companies could value as much as $30-60 million.

Series C+: Series C rounds are raised to fuel large-scale expansion, like moving into a new market (commonly international expansion), or to fuel acquisitions of other businesses.

After Series C, there’s theoretically no limit to the number of investment rounds a startup can raise, some companies will go on to raise investment through Series D, E and beyond. Given the relatively low number of startups that make it to this point, there’s also a huge amount of variance in the amounts raised, with investment determined on a case-by-case basis.

Late-stage VCs provide funding at this stage, however, because the business is also de-risked enough, financial institutions such as banks, hedge funds and private equity firms can involve themselves in investment. Funding averages about $50 million, and companies value for $100-120 million.

It’s up to you to bring yourself to the attention of powerful people around you. They’re not going to find you on their own.~Richard ParsonsTweet
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