How Does Series A, B, C Funding Work For Startups?
When your company can no longer survive off of “bootstrapping” techniques, or no long survive from your family or friends generous donations then business owners reach out for investment capital.
Many entrepreneurs are not very educated on all the different funding types to early-stage business investments. What is Seed, Series A, Series B, and Series C funding? These terms can be confusing to the entrepreneurial novice but don’t stress. I can quickly explain them.
Simply put, these letters A, B, C represent the maturity stage that the business is in who is seeking funding. These funding rounds have to do with why the investment is needed, how you will use the funds, and which types of investors you are seeking.
Investors typically receive a portion of the business in return for their investments. Sometimes investors will play an active role in your company and other times they will not. Some investors might have deep connections to help your company grow faster such as access to supply chains, marketing companies, distribution channels or a global name. These investors will likely take a more significant chunk of your business due to the ease with which they can help you grow just by attaching themselves to your company.
Before any investor will invest in your company, a thorough valuation of your company must be conducted. Valuations will vary greatly in the early stages of a company.
Valuation considerations include:
- Company management
- Market size
- The management team’s proven track record
- Early traction
Let’s consider a company’s valuation like a “pie”. For every new investment taken, your equity share decreases. Thus your slices of pie get’s smaller. However, if you feel that you can grow your total “pie’s” circumference with investors, then it’s worth it. I would rather have a small piece of a massive “pie”, than a significant portion of a tiny pie.
A seed funding round is what it sounds like, an investment to grow something. You have an idea, you have done some initial tests on the market and can prove that your business idea is valid. Now you need funding to help get it off the ground. That’s where seed funding comes in. You take an investors money and plant your business seeds. The hope is that your seed funding will grow your business into a large tree with many money making branches and leaves. The capital you can expect to raise in this round will vary significantly on you, your product or service, and your location, etc.
You will use your seed funding for market research, product development, and setting up systems and processes the company will follow. You will be able to fund salaries of employees that will do these tasks for you. Typically the investors of seed rounds are the risk-loving type that also loves substantial returns if something works.
Series A funding comes after you have started the business and you can show some early traction. People use these funds for optimising your product and customer base. For this round of funding, you will need to have your business model in place that details how your company plans to make a long-term profit. Investors love scalable companies that have unlimited growth potential, so make sure your scalability plan is easy to understand. In this round, typical investors will be Venture Capital Firms.
Series B rounds aim to take your company past the development stage. These funds typically focus on expanding market reach and growing the overall “pie” as we talked about earlier. Most funds in this round get spent on building solid teams around product development, sales, marketing, tech, support and acquiring other highly talented individuals to boost the company quickly.
Many investment firms like investing in these rounds because the business looks solid by now. The risk is lower for them. Therefore, they are ready to help take your company to the next level. Of course, every time you take on investors, you give up a slice of “pie”, but if those investors can grow your “pie” way bigger than you ever could alone, then it’s worth it.
In Series C rounds, your company is already highly successful, and investors view it as less risky. Investors coming in during these rounds are excited to work with you and are looking to double their money at a minimum. They view your company as the next big thing that they can help grow quickly and enormously. Let’s say you have a sandwich shop that utilises some of the best ingredients and has a massive following in your local city. You have several locations around town, and everyone in your town knows your brand by name. Let’s now say that you want to grow your sandwich shop all over Asia. This massive growth is where you will need Series C funding. Companies can raise millions of dollars in this round for fast and large-scale growth.
Large groups such as banks, private equity firms, and hedge funds usually make up the investors interested in Series C funding rounds.
I hope this article helps you understand news surrounding startup’s and their investment injections. Honestly, before I wrote this article, I had questions of my own. After doing my research and figuring out what each of these rounds means, I feel very confident to help more Pakistanis when they have questions regarding their startups.
Just remember, each round of investment requires the founders to give up one more slice of the “pie”. However, the objective of getting funding (investments) is to make the “pie” much larger than the founder could do on his own.
See Related Article: 60 Questions Investors Will Ask You About Your StartUp
See Related Article: How To Great A Great Investor Pitch Deck For StartUps Seeking Capital