It’s a well-known archetype: the business idea so brilliant, so innovative, the sort that comes but once in a lifetime. A business idea that’s so actionable, it can scrabble its way up from a fledgling startup and blossom into a sizable business.
Most aspiring entrepreneurs believe that if they can carry themselves safely through and past the first fiscal hurdle of initiating a startup, it’s smooth sailing from then on out.
Indeed, it’s not atypical for some to entertain expectations that their business can spontaneously grow itself into a big enough scale by merely maintaining a firm foothold on the market.
Time will see us through.
We’ll be honest: It can happen, but it rarely ever does. Especially not in the current startup market. Such a growth model only ever happens to startups that involve the innovation (and often, indeed, invention) of a truly revolutionary product. Something Zuckerbergian, if you will.
The truth is, most successful startups today are a result of meticulous funding from external entities done in well-planned, recurrent stages. This leads us to our first point of departure into what we’ll elaborate on today.
Funding rounds for startups.
So, What Are Funding Rounds?
Perhaps you’ve heard someone say, “We’re setting our books for our second funding round,” or something similar.
Funding rounds are the most surefire way to see your startup through its inception stage into the actual business. It involves consolidating money from angel investors at intervals, depending on what stage your business is at.
Of course, the upside for you is that you get to inject decent capital into your business while simultaneously growing it. Meanwhile, your investors gain the opportunity to put their funds into a worthwhile and promising fledgling venture.
For a big enough investment, the angel investor will earn some equity in your startup or an actual cut of your proprietorship pie.
If you’ve heard people talk about angel donors or “seed” funding, these are usually startup proprietors at the very start of the funding process.
However, as the startup grows, both in market share and investment potential, they gain access to different (and often higher) tiers of funding.
Series A funding, Series B, C, and even D — you will likely deem multiple rounds of funding appropriate should you feel that your startup has grown into its own.
Today we’ll take an in-depth look past the startup jargon and into these funding tiers: see what sets them apart and investigate the differences in timelines across different fields.
Depending on your startup field or how actionable it is in today’s market, it might take eons to get any decent funding. Or you might skip easily through the rounds and into IPO-level revenues.
Call it the ABCs of startup funding.
Pre-Seed Funding for Startups
To get a good grasp of what seed funding is, we first need to understand how you work up to it.
Before any external investment can be accrued, a startup will have to do some initiatory branding. Something that validates itself as an entity, a work-in-progress.
Any money raised by the startup proprietors will usually not be included in the rounds themselves and will typically fall in the pre-seed funding stage.
It typically covers the costs needed to get the business started.
Other than the business owners, other qualifying pre-seeders might include close friends, family, and other acquaintances close to the proprietors.
Again, the speed at which a startup can successfully propel through this stage will very much depend on your startup’s field of trade as well as its initial costs (think: branding, initial capital, et al.). Monies given at this stage are generally motivated more by well-wishing and gratuity rather than genuine investment intentions.
By this stage, you as the startup proprietor ought to have a clear and detailed business plan and were likely already required to register the company.
And that’s not all. Your name and identity should be ready and well-defined, as with your company’s human resource structure; your intellectual property is legally protected, and your licensing all done and valid.
Depending on your circumstances (more accurately, the circumstances of those you hope will make initial contributions to your business), you stand to inject an average of anywhere between $10,000 to $200,000 into your startup during this round of funding. For this sum, you will generally expect a 2% to 10% exchange for equity.
How to Prudently Fill up Your Pre-Seed Chest
- Make sure to spend a good portion of your pitch elaborating on your “anti-fragility” plan.
- Come up with a compelling reach-out boilerplate message.
- Be patient, but also persistent. Progressing successfully into the next level round will require some tenacity.
Seed Funding Round
What Is the Seed Round?
While the pre-seed funding round helps fund the business idea, the seed funding round helps raise working capital for the already founded business.
This is usually the very first and most crucial round of startup funding. The intention is to use the investment made here frugally and prudently enough to grow the startup and gain the necessary traction to level up into bigger investment influxes.
For many startups, this also usually marks the end of the road for seeding. Why? Either the startup stagnates, slowly faltering until it somehow manages to gain further investment — or the startup proprietor decides to let the business sustain from its current level of revenue.
Investment & Valuation in the Seed Funding Round
The process of investment here is alluded to in the very name of the round.
As long as your “seed” is well cultivated and the surrounding conditions are suitable for its germination, then a startup at this stage stands at a pretty promising vantage — if it can earn enough money to get itself off the ground.
The first step here is usually an official valuation of the company’s worth. Different aspects of the company are fiscally assessed: its accrued revenues, its risk quotient, the market size, human resource scale, its management track record, and its price-to-earnings ratio.
After this is done, the startup can open itself up for investment from incubators, friends, family, professional acquaintances, venture capitalists, and other angel investors.
Again, the amount of accruable capital here varies hugely across companies, but a range of $50,000 to $2 million is apt.
Differences Between the Series A and the Seed Funding Round
- Series A funding comes after a product has been launched and generated a reasonable amount of traction.
- Seed funding goes to product development and market research, while money invested in Series A is converted into actual working expenditure.
Series A Funding Round
The Series A funding round represents the beginning of an upward trajectory for startups that can graduate from the seed funding stage into larger, more consolidated investments.
Financing & Valuation in the Series A Round
In this round, investment isn’t made only based on an idea’s brilliance or a business plan’s future potential.
No, the numbers at the Series A round of funding demand that the proprietor demonstrates first, the product’s scalability across different markets; and second, a well-thought-out strategy for capturing and maintaining a healthy market share for the long term.
During this startup funding round, it’s not unusual for interested angel investors to engage in some pitching of their own. Attracting the right angel investors might earn your budding venture access to even larger equity investors.
This can result from nothing other than the association’s credibility, but it can also come from active lobbying by the institutional investors.
Investors in this stage will more often than not tend to be old-style venture capital firms and private equity investors. They will typically be on the hunt for startups that value in the millions to the tens of millions of dollars.
Money raised in the Series A round typically varies between $1 million to $20 million.
Differences Between Series A and Series B Round
- While the Series A funding round might, in some instances, be held for startups that are still in their inceptive stages, Series B funding is always used to scale up production.
- The equity to which angel investors might feel entitled is higher in Series A than in Series B. This is because the company is generally at a way better fiscal vantage by the next-level funding.
Series B Funding Round
The benchmark based on the demarcation between Series A and B can be summarized by the phrase: “aggressive expansion.”
In this round, funding is gathered to move the company past its budding stage. Startups that make it to the third main funding round have most likely accumulated a decent customer market share and have indicated to their investors an ability to scale extant market demands.
This is usually several years in — maybe five. Talent gathering, development of a solid marketing scheme, and consolidation of the right technology will primarily occur in this round.
Investment & Valuation in Series B Round
The average value of a business that’s well into the Series B round ranges between $20 million to $50 million. The capital raised during this round of funding averages out at slightly over $30 million.
That said, with the tech bubble being what it’s been in the past decade, these numbers are bound to rise, most especially the average value of a company seeking to attract Series B-level investments.
Differences Between Series B and Series C Round
- Unlike Series B, workforce expansion, technical outsourcing, mergers, and acquisitions tend to take place in Series C as does expansion to international markets.
- Unlike Series B and all of the initial funding rounds, there is no limit to the amount of capital influx that’s investable in the Series C round.
Series C Funding Round
By the Series C funding round, the venture is no longer a startup. It’s a well-established company with many years of service under its belt.
For most stage companies, even the largest firms with billings in the hundreds of millions, this is usually the final round of financing.
In this round, funding is sought to help complete scaling into international markets, manufacture and release new products en masse, and even buy up emerging competitors.
The proprietor at this juncture might also feel confident enough to start preparing his startup for an IPO.
Investment & Valuation in Series C Round
At this round, the investors will generally be large corporate entities: private equity stage companies, financial investment firms, and private hedge funds.
The average value of companies that tend to run a Series C funding round is $118 million, but the current valuations as they stand today are usually higher.
This is because, unlike in the preceding stages, investor funding is based not only on the brilliance backing the company but also on actual hard data.
The preponderance of a company’s successful financial track record: consistent revenue growth streams, strong consumer & market share base, accounting reports; all these go a long way to gaining access to Series C-level funding.
Series D Funding Round… and Beyond
Financing in Series D Round
The motivations for running a Series D funding round are usually to prepare the venture to go public. Specifically, to make one final push to boost the company’s valuation as far as possible before the IPO date. This is the most typical reason a company will opt for this round.
Alternatively, a company might press on with the funding acquisition because they have failed to reach their intended financial targets in the initial rounds but still wish to ready themselves for a public offering.
In this case, the company will delay opening and opt to stay private while doing their best to try and achieve their investor valuation targets.
To do this, though, they will often have to continue with the funding rounds — into Series E, F, and G even, as well as the private equity funding rounds — until they reach an appropriate vantage to go public.
If this occurs, this round is referred to as a “down round” since the startup will usually have their work cut out for restoring investor trust.
That said, numerous companies have seen themselves through down rounds and into public success, despite initial setbacks.
A notable example is Couchbase, an interactive database software service, which saw itself raise more than $100 million in its final stages of funding, despite many disruptions that were out of its control.
How Quantic Will Help You Master Your Startup’s Funding Rounds
Unlike the creative and riskier aspects of startup proprietorship, funding your business efficiently is more a science that requires evaluative skills as well as the analytical mind to attract investors. While still being able to draw up a decent enough contract that won’t leave you without the startup in the first place.
Here at Quantic, we offer consummate programs practically tailored for the aspiring business owner looking to acquire just these skills.
For starters, Quantic’s online MBA program has proven to be a game-changer in many of our alums’ business careers, and we’re not the only ones saying it. Our premier 13-month degree program is designed for mid-career professionals.
It integrates collaborative group projects with our rigorous MBA curriculum and is enhanced with specializations in management, leadership, and advanced strategy.
And you don’t have to take it from us. Vay Cao, an alumnus of Quantic Business School and founder of Free the PhD (an advocacy and career development platform for PhDs) has promising things to say about her time at our campus. Check out this case study we conducted on her work and startup.