4 Stages of Startup Funding05 Jan 2016
As a founder of a startup, investment rounds are an essential part of your startup journey. If you are a new entrant in the startup world, then you will need to quickly familiarize yourself with the terminology. You will encounter these terms progressively as you negotiate a deal with an investor. In this article, we will explain to you the stages of startup investing.
- Seed Capital
This is the first type of investment round offered to a startup. It is a preliminary stage investment, which will help a startup to establish the direction of their business. This is typically the very first investment of money used to for market research and developing the product or service. In many cases, it can come from the founders’ personal savings or from acquaintances (friends & family). Seed capital can be received as a loan in exchange for common stock. Not all startups need seed funding, but in some cases, seed funding is critical to getting a startup out of its infancy and bringing the product to market.
- Angel Investor Funding
As mentioned above, when a startup cannot get seed funded, a startup can tap into their network of individuals: friends, family or acquaintances. These are referred to as “angel” investors. The money that is taken from an angel investor can be converted to preferred stock.
- Venture Capital Financing (Series A, Series B, Series C Rounds, etc.)
Companies that are already selling their product or service, irrespective of the fact they may or may not be profitable yet, typically use venture capital funding. There can be multiple rounds of VC funding: Series A, B, C. and so on. The different VC rounds reflect different valuations. If the company is prospering, the Series B round will value company stock higher than Series A, and then Series C will have a higher stock price than Series B. In the Series A, B, C, etc. rounds of financing, money is typically received in exchange for preferred stock (as opposed to the common stock that insiders/seed capital sources (and perhaps even angel investors) receive).
Series A investment is the usually the first round of funding when the seed stage does not require outside funding. At this stage of Series A, startups have a strong defined goal for the product or service.
Series A helps may be used for:
- Adverting and brand visibility.
- How the product or service is being distributed.
- Entering new markets, engaging with different demographics.
- Scaling the startup.
The primary function of a Series A investment is usually to take a startup to the next level. Capital raised during this round is often used to meet new sales targets and defined business goals.
By the time a startup is heading for Series B investment, it is well on its way to establishing its business. The product or service is managed well, the advertising is going strong, and customers or users are actively purchasing an associated product or service as planned.
Series B may be used for:
- Expanding a team.
- Infrastructure: equipment, office space, salaries.
- Taking the business global, if applicable.
Series C and Beyond
There is technically no limit to the number of investment rounds a startup can get. Further investment rounds will depend on the anti-dilution agreements. Usually, although there are exceptions, investors and founders don’t want their stake to get watered down. As the investment rounds progress further and more equity of the company is released, Series C rounds are considered very carefully by both founders and investors.
Understanding the various investment rounds will help a potential startup decide on the most appropriate course of action. The terminology used to describe these investment rounds can seem daunting, but it doesn’t have to be. A big part of this is understanding the various rounds of investment so that you may negotiate them with ease and confidence.