Raising capital in the form of funding rounds is about more than just the stages of soliciting money to help a young business stay afloat.
You will get a better perspective when you understand the meaning of different funding rounds; that is how you will be a wiser investor or entrepreneur – or at least an educated one.
So, here are 4 important types of funding defined more clearly:
1. When Seeds Planted turn into Angels
You are what they call a startup entrepreneur and convinced that you have a bright business idea that you cannot wait for the world to benefit from. So, you seek the help of similar-minded friends to start the business, with each of you contributing to the capital from your own pockets. Eventually, your families and other relatives become convinced and decide to invest in your idea. This initial fund gathering is called the seed round.
According to equity crowdfunding platform Seedrs, a funding round is anytime money is raised from one or more investors for the business. Each round after the seed is given a letter such as A Round, B Round, C Round, etc. which pertains to their chronological order of funding rounds. Investopedia will refer to those rounds as a way of growing your business through outside investment.
During the seed round, otherwise known as bootstrapping, when your company is in its initial phase and most outside investors may not back you up due to your company’s lack of track record and risk of failing, wealthy individual investors may come to your rescue. They are aptly called Angel investors. These Angel investors who are focused on early-stage companies may invest through equity crowdfunding and organize themselves into Angel Networks or Angel Groups. Angel rounds may not be separate to the seed round, thus forming a hybrid.
2. Series A Round
Reaching A Round, (also known as Series A financing or Series A investment) will be considered an important milestone of your company. According to Fundz Pro, after the angel-seed round, your company needs to show that you have a Minimum Viable Product (MVP) to gain an A round – not just an exceptional team or idea. As reported by Pitchbook, between 2007 and 2015, the seed-to-Series-A graduation rate dropped from 35% to 7%, making the post-seed gap as the top cause of startup death.
At this stage Venture Capitalists (VCs) will provide capital to your business in exchange for the first series of preferred stocks, after the common stocks were issued during the seed round. VCs, as opposed to Angels, together with institutional investors, tend to invest other people’s money.
Fundz Pro suggests the following for your company to get A Round Funding:
- Join an Accelerator – these are fixed-term, cohort-based programs that include mentorships and culminate in a public pitch or demo day. It is said that approximately one-third of startups that raise Series A funds go through an Accelerator. Remember that the primary factor tested for acceptance into leading accelerators will be your team.
- Leverage Your Network – Although joining top-tier accelerators gives you the best statistical chance to get Series A funding, only 2 percent of applicants are accepted. Startups that successfully raised Series A without going through the said route, did so by networking early and with influential investors, whether they are Angels or VCs from leading venture capital firms.
- Extend and Nurture Your Network – You should continue to nurture and leverage angels and micro-VCs connections even before thinking of pitching them. Building and nurturing relationships before starting your Series A tour will improve your odds dramatically.
3. Series B Round
After having your team and product developed, it’s now time to take it to the next level to show strong achievements. By this stage, your company will have a higher valuation, with track-record and lower risk than before. Your company has already developed substantial client bases, growth in revenue, and success of products and services. You have proven to your investors that you are prepared for success on a larger scale.
Series B is the gas that you pour in for growth with a larger investment round. This is the time to bulk up on your sales, advertising, tech support, business development, and employees. At this time, your company will have valuations between $30 Million and $60 million, with an average of $58 Million. The average estimated capital you can raise during Series B round is $32 Million.
Series B will often be led by many of the same characters as that in Series A. The difference with this round is the addition of a new wave of other VCs that specialize in later-stage investing.
4. Series C Round
If your company has reached the Series C funding sessions, it means that you are already successful. Now you are prepared for rapid growth. At this stage, you are looking to make acquisitions of competitors, increase market share, and scale up or develop new products. You may even be poised to develop on a global scale.
At this point, you may enjoy a valuation of $115 Million or higher, which is founded on hard data rather than expectations for future success. Just like many other companies, you use Series C funding to help boost the valuation of your company in anticipation of an IPO.
Now, that your company has already proven to have a successful business model, more investors come to play, such as hedge funds, private equity firms, investment banks, and large secondary market groups. These new investors will invest vast sums of money into your company as a means to help secure their positions as business leaders.