For startup founders or venture capital fund professionals, these terms are very familiar, but for a newcomer to this world they are a set of letters that say very little. Below is a brief explanation of the basic terms in order to understand their meaning and implications.
Raising funds for the start-up of a new company, or startup, is a long, difficult and often demoralizing process. However, when it is successful, it raises capital that helps the startup grow and become everything the founders hope it will become.
One of the main challenges founders run into is that raising a round often takes longer than expected. While a founder may know their startup is great, convincing other people to invest thousands, and potentially millions, of dollars in their company is no easy task.
"I've always heard that the rule of thumb is three to four months to do a fundraiser, or that you should at least allow that," says Jenny Lefcourt, a founder and advisor who has raised more than $100 million. "I think there are a lot of people, depending on the size of the round they're raising, how successful they've been in the past, how far along they are, what their metrics are, where it could be much shorter."
However, it could also be much longer, especially if they are trying to raise during the summer months, when the fast-moving world of venture capital moves at a slower pace.
And during that time, many startups find that the stress of running out of money or, in some cases, the stress of running out of money is extremely high. Founders also find it difficult to do what are essentially two full-time jobs simultaneously: running a company and raising money for that company.
Another challenge that comes with equity financing is that there are more people involved in running the business. While most founders start out with a small, intimate team, each funding round attracts new investors.
Those investors typically expect not only a financial part of the startup, but also an opinion on how things are done. In extreme cases, they may even choose to oust a founder, as happened with famous Uber founder Travis Kalanick.
"Seeking an equity fundraiser means that for the money they invest now, investors will receive a stake in your company and its performance in the future," says Schroter. “Equity is one of the most sought after forms of capital for entrepreneurs, though certainly the least available. Simply put, there are very few stock investors with a check to write and there are 1000 times as many founders with ideas to fund. It's a supply issue."
But despite these challenges, thousands of startups raise funds each year, meaning the potential rewards outweigh the struggle and guaranteed risk. Below is a summary of what a startup founder can expect at each stage of raising capital funding.
Pre-Seed Financing
Pre-seed capital financing is the earliest stage of financing, so early that many people don't include it in the equity financing cycle.
At this stage, the founders are working with a very small team (or even alone) and 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 relatives, and perhaps an angel investor or incubator.
Pre-seed funding is a relatively new part of a startup's lifecycle, so it's hard to say how much money a founder can expect to raise during the pre-seed period.
Seed capital
What is the initial financing or seed capital?
The first money a startup raises is seed funding or seed capital. Some may raise pre-seed funds to get them to the point where they can generate a traditional seed round, but not all go that route and go directly to those traditional rounds.
The name itself explains the type of investment: this is the seed that will (hopefully) grow the new company. Seed funding is used to take a startup from idea to early steps, such as product development or market research.
Seed funding can be sourced from family and friends, business angels, incubators, and venture capital firms that focus on very early-stage startups. Business angels are perhaps the most common type of investor at this stage.
This is also the end point for many startups. If they can't gain traction before the money runs out (also known as run out of track), they will be removed.
On the other hand, some startups decide that they are not interested in raising more money, that the level they reach with seed capital is good enough, or that they can grow further without further investment, and choose to stop raising funding rounds at this point.
How much money is handled in the seed capital
The initial financing or seed capital usually ranges between 500.000 and 2 million dollars, but can be more or less, depending on the company. The typical valuation of a company that generates a seed round is between 3 million and 6 million dollars.
Series A financing
Once a startup gets through the early stage and has some traction, whether it be the number of users, revenue, views, or any other key performance indicators (KPIs) they have set, and they are ready to generate a round Serie A to help take them to the next level.
In a Series A round, startups are expected to have a plan to develop a business model, even if they haven't tested it yet. They are also expected to use the money raised to increase revenue.
How much money is mobilized in a Series A round
Because the investment is larger than the seed round (typically $2 million to $15 million), investors will want more content than they need for seed funding before committing.
It is no longer acceptable to have a great idea: the founder or founders must be able to show that their great idea will produce a great company. The typical valuation of a company coming out of a seed round is $10 million to $15 million.
Series A rounds (and all subsequent rounds) are usually led by an investor, who is the anchor of the round. Getting that first investor is essential, as founders will often find other investors lining up once the first one has committed.
However, losing that first investor before the round closes can also be devastating, as other investors often drop out as well.
Series A funding typically comes from venture capital firms, although business angels may also be involved. Also, more companies are using equity crowdfunding for their Series A.
Series A is a point where many startups fail. In a phenomenon known as the "Series A meltdown," even startups that are successful with their seed round often struggle to secure a Series A round.
Only 46 percent of seed-funded companies will raise another round. That means this is the end point for most early-stage startups.
Series B Financing
A startup that gets to the point where it is ready to raise a Series B round has already found its right product/market and needs help expanding.
The big questions to answer now are, for example: How to make this newly created company work on a large scale? How to go from 100 users to 1000? How about 1 million?
The expansion that comes after a Series B round is raised includes not only gaining more customers, but also making grow the team so the company can serve that growing customer base.
To be competitive, any startup needs to hire great people in a variety of roles. It is no longer possible for the founder «wear all the hats«, so it is essential to raise enough money for competitive salaries and specialized and committed professionals.
How much money is mobilized in a Series B round
A Series B round is usually between $7 million and $10 million. Companies can expect a valuation from this investment of between $30 million and $60 million.
Series B funding typically comes from venture capital firms, often owned by the same investors who led the previous round. Because each round comes with a new start-up valuation, previous investors often choose to reinvest to ensure their share of the business remains significant.
Companies at this stage may also attract the interest of venture capital firms that invest in late-stage or late-stage startups (depending on the investor's perspective they use one term or another).
Series C Financing
Companies that reach the Series C financing stage are doing very well in the early market and are ready to expand into new markets, acquire other companies or develop new products.
Typically, Series C companies are looking to get their product out of their home country and into an international market. They may also be looking to increase their valuation before opting for an Initial Public Offering (IPO) or acquisition.
Once a company has created a product that has become a market darling, that's when investment bankers and private equity come in. These profiles are not looking for much risk, they leave that aspect to ibusiness angels and venture capital firms. They seek to invest significant amounts of money in companies that are already winning or have a clear winning trend in order to secure their leadership position.
Series C is often the last round a company raises, although some continue to raise using other terms such as Series D and even Series E, or more.
However, it is more common for a Series C round to be the final push to prepare a company for its IPO or acquisition.
How much money is mobilized in a round of Series C
For their Series C, startups typically raise an average of $26 million. The valuation of Series C companies is often between $100 million and $120 million, although it is possible for companies to be worth much more, especially with the recent explosion of startups with valuations above $1.000 billion called "unicorns." .
Judging at this stage is not based on hopes and expectations, but on concrete data points. How many clients does the company have? What is the income? What is the current and expected growth?
Series C funding typically comes from venture capital firms investing in late-stage startups, private equity firms, banks, and even hedge funds.
This is the point in the startup lifecycle where major financial institutions may choose to participate, as the company and product are proven. Previous investors can also choose to invest more money in the Series C item, although it is not required.
Series D Financing
A series D funding round is a bit more complex than previous rounds. As mentioned, many companies end up raising money with their Series C. However, there are a few reasons why a company might choose to step up to a Series D.
The first is positive: They have discovered a new expansion opportunity before opting for an IPO, but just need another push to get them to face that option. More and more companies are raising Series D rounds to increase their value before going public. Alternatively, some companies want to stay private for longer than used to be common. Each of these are positive reasons to raise a Series D.
The second is negative– The company has failed to meet expectations set after raising its Series C round. This is called “round down» and it is when a company raises money with a lower valuation of the same companies than the one it raised in its previous round.
A round down can help a company get through a rough patch, but it also devalues the company's stock. After rising from a round down, many startups are finding it difficult to climb back up to the previous valuation as confidence in their ability to deliver on their promises has eroded. Downside rounds also dilute founders' resources and can demoralize employees, making recovery difficult.
How much money is mobilized in a round of Series D
Series D rounds are typically funded by venture capital firms. The amount raised and valuations vary widely, especially since very few startups make it to this stage.
Series E Financing
If few companies make it to Series D, even fewer make it to Series E. Companies that make it to this point may be raising capital for many of the reasons listed in the Series D round: they haven't met expectations; they want to stay private longer; or they need a little more help before going public.
Other types of financing for startups
While equity financing in these series is a popular option for startups, particularly technology startups, it's not the only option for fundraising.
In fact, there are several ways a founder can raise funds for their startup, and some experts believe it's best to use a combination of methods including through crowdfunding, small business loans, grants, private investors, business angels, …
