Raising equity funding for your startup is a long, arduous, and often demoralizing process. Placing the future of your business in someone else’s hands is never easy. However, if you succeed, you can walk away with money that will help your startup grow.
Some startup owners often underestimate the complexity of the process. This may not be surprising though–most entrepreneurs are passionate about their businesses and believe that their whole concept is simple, unique, and definitely worth investing in. If they do get the investments needed then they will need to put together a cap table to show where each of their investments come from, over time this will change as funds are added and investors become more/less involved. This table must always stay updated.
If you’re interested in raising capital for your startup, it’s important to understand that funding comes in many stages. Let’s take a deeper look at each stage of funding.
Pre-seed and seed funding
Pre-seed and seed funding are the earliest forms of business funding. Typically, pre-seed funding comes first for businesses. At this stage, founders usually work on building product prototypes or some form of proof-of-concept. Raising money to develop a prototype or proof-of-concept is a task that the founders themselves need to undertake. That’s why funding often arrives in the form of personal savings, financial help from family and friends, angel investors, or crowdfunders.
After pre-seed comes seed funding which is used to take a startup from idea to the first steps, such as product development or market research. Sadly, this stage is also known as the endpoint for many startups since many businesses fail to find the funding that they need to go beyond the seed stage. However, some startups may decide that the level they reach with seed money is good enough or that they’re able to grow further without more investment-and choose to stop raising funding rounds at this point.
Typically, seed funding involves figures between $3 million and $6 million.
Once a startup makes it through the seed stage and has some kind of traction, whether it’s a number of users, views, revenue, or whatever other KPIs they’ve set, they’re ready to raise a Series A round. In a Series A round, startups are expected to have a business model, even if it hasn’t been proven yet. A credible revenue stream isn’t expected at this stage.
You need to keep in mind that investors will want more substance than they required for the seed funding before they commit. That’s why just having a great idea is not enough at this point. You need to be able to prove that the idea you have will make a profitable company.
Series A funding usually comes from venture capital firms, angel investors, or equity crowdfunding.
When your startup has successfully reached product-market fit, it’s time to raise a Series B funding round which is all about scalability. At this stage, you need to have clear evidence that you can expand your customer base double digits. The expansion includes not only getting more customers on board but also growing the team so that the company is able to serve this growing customer base. Building a great team requires quality talent acquisition. Bulking up on sales, marketing, development, and support teams costs a firm a few pennies. The average estimated capital raised in a Series B round is $32 million.
Startups that make it to Series C funding sessions are already performing very well and ready to start expanding internationally and reach wider audiences.
Series C is often considered as the last round of fundraising that a company engages in before going public, but some companies will move on to Series D and even E. Investors at this stage are mostly private equity firms and venture capital firms.
According to Tech.co, the average sum raised by businesses during the Series C stage stands at around $26 million.
By this point, many startups establish themselves in a way where they’re comfortable in generating their own revenue streams and do not move on to the Series D stage. However, there are two main reasons why Series D investment can be required:
- Companies have discovered a new opportunity for expansion and need another boost to get there.
- Companies haven’t hit the expectations laid out after raising their Series C round and now have to raise more cash to survive.
However, Canva‘s Series D round can be an illustrative example of successful funding that helped Canva invest in research and development for its first push into the enterprise.
Series E is a fundraising round that acts similarly to that of Series D. Companies at this stage usually raise for identical reasons mentioned in the Series D round: they failed to meet expectations or they just need a little more help before going public.
When you’re seeking investors it is important to remember to look out for people who have the most knowledge and experience in your industry. They can help you gain exposure to key industry players and increase your chances of getting key partnerships and more customers.
Let’s sum up what we’ve learned about each funding stage.
Pre-seed funding is the earliest stage of funding. At this stage, founders work with a small team, and the main focus of their work is on developing a prototype or proof-of-concept. The money to fund a pre-seed stage usually comes from the founders themselves, their families, friends, and sometimes an angel investor or an incubator.
From Seed funding to Series B, investors help nurture and develop your ideas.
Series C investors will support your business and give you the proper capital to fully achieve your company goals.
Series D & E provide your business with extra opportunities to boost your valuation, help it recover from financial losses, or simply allow you to stay private for longer.
That’s it. Now you know how series funding works.
All that’s left to do is turn your idea into a successful company. Good luck!
Author’s bio: Anna Grechko is a marketing enthusiast and knows the field inside out. She is the marketing specialist at Smart IT. Sharing knowledge is a big part of her career, so Anna actively seeks to spread good vibes, and collaborates with the great tech and marketing minds of the world.