There is no universal funding guideline to succeed in every startup. We will discuss how funding works by presenting 5 TYPICAL FUNDING ROUNDS and explaining the venture capital principles you apply to your individual case.
Startup Seed Funding: 5 Rounds and More Distinctions
Everything changes round by round, but you always start with the most ‘expensive’ money. Be careful and spend this money wisely: hire juniors with adequate portfolios, delegate responsibilities, address presentation design services, or try to find volunteers who need experience.
Stages of Startup Funding:
- Series A funding.
- Series B funding.
- Series C funding.
How does startup funding work?
New shares are issued every time the round is made, and all the existing shareholders are diluted. For example, a company is worth millions, and the founder has the greater share. Getting great investors on the board changes the total ‘pie’, but it is worth it in perspective.
If you’re interested in series A funding vs series B or how series C funding works, proceed with this article and get to know all characteristics in detail.
How Does Venture Capital Funding Work?
1. Venture capitalists appear at any stage if they notice a product/service capable of reshaping markets and growing fast.
These investors are wealthy independent personalities or people from big corporations. If they see that the profit outweighs the potential risk, they invest in the idea. You should have a business plan, a product roadmap with an attractive pitch deck design, and a real achievement of what you’ve done so far.
2. Venture capital is a high-risk game for investors who love tech, but they know how high-rewarding it could be.
They are interested in tech startups because they scale up easily and achieve the expected success. The easiest money comes playfully, and investors know this principle well to allow themselves to contribute to precarious but promising projects.
Mistake #58623: Seed funding for a startup from your wallet
Some startups create a pool of money based on personal debt or customer revenue. But going into debt might lead to wasting years of your life and product development, so customers should be your main guiding line when inventing a service/product.
✓ By not raising money, you maintain control and get the freedom to do whatever you want.
⊗ Raising money makes your startup more of a job that gives you employees and duties.
How to Raise Pre-Seed Funding?
Pre-seed funding for startups is your opportunity to go from a rough idea to a product launch, using investors’ money and their desire to invest in revolutionary things. Pre-seed investors invest in the round of <$1 million to help early-stage companies to get started. The goal is to help a team like yours get traction and meet the threshold set by seed investors.
Difference between seed and pre-seed funding:
The distinction is the higher probability of getting money and the trust of investors in vague metrics and market analysis. A pre-seed round shows how well you’ve analyzed the market, while a seed round proves your product fits.
How Does Pre-Seed Work?
Consider the scenario: you start a company, need money, and get lucky to find an investor with high pre-seed funding amounts to grow that seed to a series A round or more. Another storyline version consists of your budget, right? Your credit cards, savings, relatives, and friends – this small amount of money may define your further success too.
Have a plan: to make your pre-seed work funding, elaborate on the business plan because failing to plan is planning to fail. If you need money, we recommend using something other than your savings. There are tools, techniques, and approaches to how to sell your idea and business plan at the initial startup pre-seed funding stages.
8 Insights for First-Time Founders
Be ready to work much to get the benefit from pre-seed funding for future startups:
- You need a launched product with metrics to unlock the seed round.
- You will start by raising a pre-seed budget of $250.000.
- You will raise on lower valuations $6M-$8M.
- You will meet many requirements to show proof before fundraising.
- You will work for the reputation to make your name work for you.
- Your goals for more than one year are irrealistic.
- Your investors expect a business model with a success probability.
- Your investors want to see the expected return on investment.
Unit economics, cost of acquisitions, expenses on marketing – this and more is required to evoke trust in investors and show they will not lose their money but get more over time.
What Is a Seed Funding Round?
Seed funding startup requires primarily a small amount of money borrowed from friends or relatives to start a business or develop a product idea. Most experts object to loans because you never know the business’s success or failure so credit percentages can impress negatively.
You will need early investors who are high net-worth people able to give you the necessary capital.
For this one, you need a strong statement and a startup seed funding pitch deck to present your idea best. Apart from choosing the correct investors, you must impress and attract them with your problem-solving hypotheses, competitive advantages, and promising milestones.
How to Get Seed Funding and Benefit from It?
You decide how much they can buy, and you, as a founder, determine what percent of the firm they get. Let’s talk in numbers:
they give $100,000 → they get 10% → your company is valued at $1 million
Thus, you own 90% of the company. And this is how seed investment actually works, unlike the venture capital investments that take off your company part.
5 Bonus Seed Funding Pro Tips
- Bootstrap as long as you can: investigate a marketplace, go to the cinema, rewrite the business plan for the 8th time, eat noodles, and teach to be resourceful. Many founders fail because of their impatience to go out with money and idle things.
- Do not value the fresh company too high too early. Otherwise, you’ll never be able to raise more money. Be realistic and assess your product fairly.
- Do not ask for money – ask for advice. People invest emotionally, review your plan, review a seed funding pitch deck,
- and get interested. As a result, you get a buyer and a profitable partnership, which you should not agree on immediately though.
- Every time you raise money, make sure you do a thorough background check. Answer “Do they really enjoy my company?” or “Have they been good to other entrepreneurs?”. You can’t fire or get rid of troublesome and nasty board members as easily as it seems.
- Prepare to have less than 50 % of your company when you finally go public. And it is OK. That is why collecting board members who can back you and love your product genuinely is essential.
Series A Funding Meaning
Series A funding is the first round of significant company investment. The standard deviation or the typical range of series A startup stock is from $17 to $25 million. After your business has accelerated, you need less money. If a company raises series A funding, its business plan and initial results have been scrutinized seriously and moved to series B. It also demonstrates that the company has shown real potential to tap into a big market.
How do you hook investors for Series A Investing?
VCs and ‘super’ angels are commonly associated with series A investments. If you want to meet investors and benefit from it, prepare and research: know what they’ve invested in, what they care about, etc. To capture their attention in the first minutes to get series A investing, we recommend simplifying your pitch all the time. We totally believe that you are working on something fascinating, but many fail to talk boringly about it. Do not act like this and build the story compelling from the very beginning.
To get series A funding, you need the following:
- Investor presentation.
- Financial plan.
- Fundraising strategy.
- Cap table.
- Term sheet.
- Due diligence.
- Shareholder’s agreement.
- Corporate governance.
Series A Funding Goals
The main objective of the series A investment is to scale your product. You need plans, milestones, and pitch deck presentations for long-term profit. Sounds quite general, right? We agree, and we define the next more precise series A startup goals:
- cover up salaries of people involved;
- attract new talents;
- finalize business model as easy to scale and adapt rapidly;
- ensure you have a smooth pitch and compelling narrative;
- practice networking to reach the best investors for future rounds;
- make additional market research to ensure your product fits in;
- check all legal documentation complies with requirements;
- mitigate risks that are highest at this round;
- reach milestones in product development;
- finalize product/service to introduce into the market.
The competition is high but possible to resist. If you believe in your idea and understand how to analyze the market of the future, you reach objectives ahead of everyone.
Series B Funding Meaning
Series B funding comes when your company is well-established and needs to increase its market reach to reach more customers.
Series B startup is a challenging process because it’s essentially its in-between stage. You might already have a lot of interesting reference customers and acquisition models, the team is quite strong, and you’ve brought some beneficial executives. However, some talent is still missing, and different models haven’t been tested.
How do you get to the other side? And how do you actually bridge that gap and bring on a series B startup round? Series B funding is a combination of the momentum you’ve already built in the company and your vision as the founding executive of the team. At this round, you approach the picture of how you will realize your company’s full potential value.
What Is Series B Funding Principle?
! You need to have a point. You need to sell a story. You need to present a vision !
- What is the market gap?
- Where is the market going?
- How can you continue to be a significant player?
- How do you plan to grow?
- Does your vision change significantly from series A to series B?
Series B companies must combine their vision and actual data in a really cohesive manner to become successful fundraisers. You must only sell a vision that matches the historical data.
How Much Is Series B Funding?
Typically, you will have the same investors as on series A. VCs and late-stage VCs will be your common investors. An average funding series B startup can get from them is $15-20M, but it can vary widely with no absolutes. So, you must roll the hard six to reach series C and unprecedented success. This budget will open new opportunities for buying businesses, hiring professionals, and expanding the market.
To pass the series B stage successfully, you have to:
- focus on taking the business to the next level;
- complete all significant milestones on series A;
- pour the gas on growth;
- show the ability to reach and surpass well-planned goals;
- build upon that success with additional investment.
Finally, your company is a well-established entity, but you still need investments to merge with or acquire another company. If you did everything correctly in previous stages, here is when series C funding comes to the need.
Series C Funding Meaning
Series C funding makes the business appealing for the acquisition or support of a public offering. Series C investors expect to get double the invested amount back in such a business. They bet on successful companies able to scale as quickly as possible.
Series C investors will never invest in dubious projects because the higher the investment round, the more business capital is released.
Common series C funding round characteristics:
- 12 to 18 months to reach.
- Accessible for successful companies.
- Strong customer base.
- Operations get more experienced and, thus, less risky.
- New product development.
- Large-scale expansions.
- Strengthening yourself as a business leader.
- Market share maximization.
- International markets acquisition.
- ~$45M investment.
- Valuation ~$100M.
- Valuation is based on solid data of previous success.
- Preparation for public listing (IPO).
How Much Is Series C?
The required budget depends on your goals as a company and the expectations the investors are looking forward to getting from you as a founder. Typically, a startup raises an average of $40-50M, but the valuation may fall to $100M-$120M. This money comes most frequently from private equity firms, banks, or venture capital firms.
What Happens After C Series Funding?
Most companies stop addressing investments after series C, but some proceed to series D if some goals aren’t completed, or a stable base before an IPO is required. A series D round is more challenging than previous ones. Venture capital firms typically fund it, and the amount raised varies widely. Several startups only reach this stage, so exact valuations cannot be determined.
Fewer projects rise to a series E. Nevertheless, if they did not meet investors’ expectations or wanted to remain private for more time, they would need more funding before going public (IPO).