Even the best business idea and the most promising start-up will need money to launch their product, to market and grow the brand and to turn it into a successful business. Raising funds and looking for investors, presenting a business idea at a pitch event and defending it against all kinds of questions might seem challenging. As a founder, you will eventually do it and you will get used to it. By the third round of fundraising, you’ll be an expert! What are these rounds of investing? Which are the different stages a business goes through from start-up to scale-up and to exit?
This is the very first round of funding and the very early days of a start-up. The capital you’re raising at this stage will help you develop the product and to refine your business plan. You could also call it the research phase. At this stage, you should have an answer to questions like: Is your idea viable? How much money will you need? What business model will you use? You should also ensure that your business idea is unique, i.e. nobody else has done it before. Investors at this stage are often friends and family or the founders themselves, sometimes smaller venture capitalists (micro VCs). When you hear a founder say that they’re currently bootstrapping, they’re usually at pre-seed stage. Depending on who you ask, pre-seed funding might not be considered an official funding stage.
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This is the first official round of fundraising, and your start-up can be considered a business and has gained some traction, but no revenue. As the term “seed” suggests, you could say that you’re planting a seed out of which the business will grow. The investment in this round is usually spent for market research and product development. Many start-ups also use it to hire their first employees to get things off the ground. Investment amounts are up to $3 million. The business valuation is in the range between $3 million and $6 million.
At this stage, it is not uncommon that investors to gain equity in the business. Potential investors at the seed stage are:
- Friends and family
- Early-stage Venture Capitalists (microVCs)
- Angel Investors
This is probably the most difficult funding round as investors need to show a lot of faith in your business idea. Clint Greaves pointed out in one of the investor interviews we’ve conducted at Othership that start-ups at this stage often don’t have reliable numbers that could prove long-term success. Investors accept a big risk at this stage. Luckily, there are tax relief schemes such as SEIS and EIS that make it a bit more attractive to fund early-stage businesses.
There are two ways a business can go after seed investment. Either the seed investment was all that was needed, and the business can now continue to flourish based on customer revenue, or another round of investment is required for further growth, e.g. additional product development, expansion into other markets.
Series A funding
Series A funding becomes relevant for businesses that have a good track record in terms of revenue, customers or other performance indicators and wish to further develop their products or markets. Key at this stage is a long-term business plan. How are you looking to expand if you get additional funding? The amounts of investment in this round are a lot higher (up to $15 million) and you’ll see fewer Angel Investors becoming active in this round and more established Venture Capitalists and accelerators. They usually take company shares in return for their investment. The business valuation is between $10 million and $30 million during Series A funding.
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Series B funding
Once business success has been proven at a larger scale, Series B funding might become relevant. The business is past the development stage and onto further growth. The investment is often used to increase market share or employ bigger teams for the business. The process and type of investors are similar to Series A funding, just the amounts are a little higher (up to $30 million). Company valuations at this stage are in the range of $30 million to $60 million.
Series C funding
At this stage, there is no doubt that you have an already successful business, and the term “start-up” is probably not applicable anymore. Series C is often sought to build new products, expand globally or acquire smaller businesses in the same space. The business is now more attractive for investors as it has proven to be successful. Next to large VCs, also hedge funds, investment banks, and private equity firms might show interest hoping to double their investment which can be as high as $50 million. The company valuation ranges between $100 million to $120 million.
Some companies even go for further funding rounds in Series D and Series E, but it is not very common. Series C is usually the last stage, and it is not uncommon to use this investment to help boost company valuation in anticipation of an IPO.
The Initial Public Offering (IPO) is the last stage in the start-up lifecycle and often allows the founders to exit. At this stage, the company offers its shares to the general public. Selling shares to the public is the reward founders and investors get after building a successful business. There are still a few legal steps involved before entrepreneurs can use the happy sentence: “We’re going public.”
You will always find advice, tips and feedback in the Othership community on slack. Many of our members have gone through start-up investment rounds and can share their experiences.
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