As a startup founder, you might be well-versed in the ways that you can raise money for your business.
However, raising funds from investors follows a more specialised process. Known as ‘funding rounds’, different rounds of raising capital occur at different stages of a business’s development and they play different roles in growing a startup to its full potential.
In this article, we’ll give you a primer on what the different rounds of startup funding are and how you can use this information to tailor your investment pitch accordingly and understand what your trajectory could be if you are on the path towards raising equity funding.
These definitions always leave a little room for interpretation, as the boundaries between the rounds aren’t always clear cut. What they can do is give you orientation for your future funding journey.
What are the main startup funding rounds?
Pre-seed
This is the stage of your business where you’ve got a winning idea, perhaps a co-founder and the determination to get it off the ground. Many founders invest their own money, but this is also where friends and family can step in to help. Angel Investors may also invest at this time. Due to how young your startup is in its life-cycle, your pitch should focus on your idea and the entrepreneurial personalities of the founders.
Seed Funding
At this point in time, your startup will have launched but still be in the very early stages. After a startup has identified its target market and fleshed out its idea, it can attract more investors. Investors at the seed-funding stage tend to be Angel Investors who will want to receive equity in the business. The money you raise at this time will go primarily towards research and further developing your product.
Series A
Series A is where things really start gathering pace because businesses at this stage will generally be generating revenue, but not yet profit. Investors will look at how your capital raised from seed funding was used and how further capital can be used to grow the business to new heights. This is also the point at which Venture Capitalists may enter the picture to invest large amounts of money. This funding is geared towards growing your team and attracting talent that will grow your startup to the point where it starts generating profit.
Series B
When the time comes for your series B funding, your company will be well-established and looking to expand into overseas markets. This funding round attracts mostly Venture Capitalists because the money raised tends to be quite significant, often in the range of several million. A startup going through Series B funding will most often already be independently successful, with the funds raised used to further cement its place in the market. A good example of this is Airbnb, who in 2011 raised $119 million in Series B funding which went towards the “hiring of a world-class team and strengthen the Airbnb community at the local level.”
Series C
By this stage, a startup has already brought in steadily growing profits and built a large in-house team that can meet customer demand. Startups, when they get big enough, tend to go one of two ways – to file for an Initial Public Offering (IPO) or to be acquired. The startup will have a high valuation at this point, with some even achieving unicorn status. Series C is when funds are invested to achieve one of these goals, and funds are provided mostly by Venture Capitalists and hedge funds. As Uber demonstrated in 2013, Series C funding is usually in the hundreds of millions ($258 million was raised by Uber) and aims to accelerate growth.
Conclusion
Building your innovative idea into a profitable business no doubt requires money, and as your startup grows, the types of investors you’ll want to attract will also change. Early on, investors will look primarily at your idea and its potential. As your business progresses through each round, investors will want to see numbers that reflect your business’s growth. Once the company has a little bit of a track record, it could be useful to have a look at debt funding as an accelerant of your success.
This article was contribuited by our friends at Lawpath
Lawpath is Australia’s leading provider of online legal services for businesses and individuals, providing technology powered legal solutions at a fraction of the time, cost and complexity of the traditional system.
