Understanding Startup Funding Stages
What is a Seed Round? Do you require the A, B, or C series? This financial mumbo-jumbo (jargon) can feel intimidating to ambitious entrepreneurs, but it doesn't have to be. Several funding round structures have become increasingly established in recent years, especially in the technology sector. But as tech startups become wildly successful, the model is spreading to other industries.
You may not need to know anything about how Series B works. Many small businesses find the funding they need without going down this route. You will probably only come across it if you plan to seek outside investors such as angel investors or venture capitalists.
1. Seed Funding
Seed capital is an external investment in an early-stage startup in exchange for equity in the company. Typical investments made during seed funding are between $10,000 and $2,000,000. Seed funding is especially popular in the tech industry. The advantage of seed capital is that it gives you quick access to more capital. This allows your startup to grow, scale quickly, and gain more traction. At the seed stage, these investments often come from friends and family.
Investors in the seed round typically receive convertible notes, as the company has yet to perform a basic valuation. Convertible bonds offer shares as repayment instead of interest or cash.
2. Series A Round
Series A funding is typically the first round of funding from outside investors. Series A's usually come after a startup has started making money but hasn't turned a profit yet. Series A investors typically receive preferred stock (which does not give shareholders voting rights) in exchange for their investment. It can be converted into common stock at a later date.
Series A investors are taking significant risks (the company is not yet profitable, and many startups have failed), so if the company succeeds, its stake is usually worth quite a lot. You can get rewarded.
3. Series B Round
More established startups are aiming for Series B rounds. They made it through the seed round and Series A. They are either at break-even or close to it, but generating enough revenue to warrant a solid valuation. Series B investors, on the other hand, tend to receive preferred stock in return for their equity investments. Investors typically receive lower returns at this stage than Series A investors because Series B fundraising is (or should be, in theory) less risky.
4. Series C Round
Series C funding occurs when a company is in the later stages of its funding cycle and growth process. This works similarly to Series B rounds. Typically, investors want to see a higher valuation for a Series C than in previous rounds. This indicates that the company is healthy, profitable, and growing. Investing in Series Cs has the lowest risk, so investors receive the lowest return on their investment.