The early stages are the most challenging times for a startup.
Creating prototypes, hiring staff, organizing manufacturing runs, market analysis, and other activities to establish the company require funding.
However, start-ups do not have any income from sales in the initial stages and the cash flows are limited.
A majority of the entrepreneurs cover the set-up costs through pre-seed funding and seed funding. Once the company gets off the ground and starts running, there may be a need for additional capital to propel business growth.
In such circumstances, start-ups opt for Series funding. Start-up funding series can run into multiple rounds, which are indicated by letters A, B, C, D, etc.
Let us take a closer look at different startup funding rounds and what sets them apart.
Though the journey of each startup is different, understanding different types of funding are crucial for entrepreneurs. The timelines for different funding rounds may be different for every start-up depending on the nature of the business and the size of the company.
Some companies may take off with pre-seed or seed funding and become highly profitable, never requiring further series funding, while others may require multiple rounds of series A, B, C funding.
Pre Seed Funding
There are many set-up costs that you will have to meet at the time of establishing a start-up. These costs include money required for acquiring the necessary permissions and licenses, acquiring property, applying for trademarks and brand names, tooling and machining, and so on.
Pre-seed funding is used to meet these initial set-up costs. It is the earliest funding received by a start-up and is not counted as part of the start-up funding series as most of the time, the founders of the start-up are the investors in this round.
Founders use their savings or get funding from family, friends, and supporters at this stage.
The main point that distinguishes pre-seed funding from other rounds of series funding is the motive of the investors.
The investors in pre-seed funding are the founders themselves or their family and friends, who do not invest in return for equity. Bootstrapped businesses often do not raise capital beyond this stage.
Seed funding is the official entry of a business enterprise into the startup funding series. Seed funding is the first external investment in the start-up.
You can raise seed funding when the startup is in the product development and market research stage.
It is easier to understand what seed funding is through the analogy of a seed. Just as a seed can grow into a giant tree someday, seed capital helps struggling startups to grow into giant corporations.
In the seed funding process, investors invest money in exchange for equity in the company. The investors in the seed funding stage can be founders, founder’s friends, and family, venture capitalists, accelerators and incubators, and angel investors.
Since the risks of investing in a startup are higher, the investors receive higher equity per capital invested in the seed funding stage.
The amount of seed funding a startup can receive depends on its valuations. The valuation of a company is done by a third party and includes various parameters such as the track record of the founders, what is the idea, the estimated market share, and the risk level involved.
At this stage, the valuations are based on the qualitative evaluation of the business idea and the ability of the founders to monetize it.
Series A Funding
Series A funding for a startup follows the seed funding round in the start-up funding series. At the series A funding stage, a startup is generating revenues but is still at the pre-profit stage.
To qualify for this round, the startup must have a track record of a loyal customer base, consistent revenues, and a robust business model.
Similar to seed funding, a startup secures additional capital by selling company shares. However, the amount of equity given per capital invested is lower when compared to the seed funding round.
Usually, startups give preferred shares, convertible preferred shares or common stock to the investors. The investors in series A funding are mostly venture capital firms.
The amount of finance raised in series A funding varies from industry to industry. While the capital is higher for high-growth sectors, it tends to be on the lower side for others.
The valuations of a business play a crucial role in Series A financing.
The valuations for Series A funding are based on the progress made by the company using its seed capital, the efficiency of its management team, the ability of the team to use available resources to generate profits, the order book value, and the revenue generated by the company.
When To Start Series A Funding for a Startup?
Venture capitalists look for a set of milestones before they commit funds for a startup. Here is a checklist of milestones to achieve before you scout for investors for series A funding
- You have a valid business model that can be scaled according to the growing needs of the startup
- You are already generating revenue but at a smaller scale
- You have a decent base of customers and have a plan to increase the numbers
- You have a strategy to monetize your idea and grow it into a money-making business
- You have completed market research and know where your products fit into the market
- All of your legal documentation and compliance certificates are up-to-date and accurate
Once you tick most of the boxes, it is time to prepare a pitch and approach the venture capitalists. The choice of venture capitalists plays a significant role in determining the success of your pitch. It is critical to approach the right investors with interest in your industry.
It is advisable to do some research about the investment scene in your industry before you shortlist the potential investors to approach for Series A funding for your company.
Follow the 30 -10- 2 approach.
Introduce your company to 30 potential investors, out of them 10 investors may want to meet you for further discussions and 2 of them may want to invest. If you cannot find the 2 investors initially, you have to start the entire process again.
How to prepare a Pitch for Series A Funding?
How you pitch to the potential investors determines your success in series funding. Instead of presenting raw facts and figures, you should create a compelling narrative that interests the venture capitalists and motivates them to invest in your company.
The pitch should be refined and present all the key details of your business. Your pitch should contain details about
- Your background and experience in the industry
- What are the problems encountered by your potential customers
- How your product/service is going to address those problems
- What is the USP of your product that makes it different from your competitors
Series B Funding
Series B is the third round of startup series funding. It comes at a stage when the business is well established and is generating profits. The valuations of the company are higher when compared to the series A stage as the company now has more physical assets and better financial records.
Investors in Series B funding get less equity in return for their capital as the company’s valuations are higher and the risks for investors are lower.
Valuations for series B funding are more accurate than the other rounds because of the availability of quantitative data.
The process of preparing a pitch and selecting investors is the same as in the case of Series A funding.
In this stage, the venture capitalists who already invested in series A may enhance their investments to get more equity in the growing business.
Series B funding is generally used to scale up the operations of the startup to take it into the bracket of larger businesses. The funds are used for talent acquisition, business development, increasing productivity, customer outreach, and marketing activities to enhance the product reach.
Series C Funding
Series C funding comes at a later stage when the company is mature and successful. Most of the time, series C funding is a precursor to going public. However, some businesses may opt for more rounds of series funding such as series D, E, and so on, before going public.
The equity traded per capita is much lesser in this series in comparison to the first three rounds as the company has clear and reliable valuations, physical assets, and financial records.
A company going for Series C funding is not a startup anymore. It is a successful company in the later stages of development with strong revenues and healthy profits. Businesses opt for series C funding to scale up and expand their operations, to acquire other companies, to develop new products/services, and to expand into new territories.
As the company has already proved its worth and is successful, the number of investors increases. Apart from venture capitalists, more groups such as hedge funds, private equity firms, investment banks, and groups of secondary investors show interest to invest in the business.
Series A, B, C fundings have both similarities and differences. The major differences between these series funding stages are the stage of the business at the time of opting for each series, the amount of risk involved, and the equity per capital received by the investors.
Since the business is at very early stages while going for series A funding, the risks are higher and the equity allotted per capita is higher. As the business establishes its credentials and starts generating profits, the risks reduce for later series of fundings and so does the equity allotted per capita.
The similarity between all the series funding is that every round of funding helps the business to grow and expand its operations.
Every stage of business growth requires capital induction from internal or external sources. Series funding is a method of acquiring capital from external sources. Startups issue shares in return for capital from the investors.
Understanding startup funding series helps entrepreneurs to be prepared for the demands of every stage of business.
There is no fixed rule on the number of fundings a business may opt for. Some businesses take off using the seed capital and may never require further series funding, while others progress to series A, B, C, D, and further.
The valuations of a company for every round of series funding differ as the criterion evolves with business growth. The valuations depend on the qualitative analysis of the idea at the seed funding stage while they depend on the qualitative data for series B, C, and further rounds.
Let us know if we missed out on anything in this article Series Funding and share your thoughts in the comment section.