In the previous blog post about funding, We got to learn many things about funding. So if you have not checked it out, read it here. But, now we’re gonna talk about the different rounds/ Series of funding. While there are a very small number of fortunate companies that grow according to their business model (with little or no “outside” help), the large majority of successful startups have engaged in many efforts to raise capital through Series rounds of external funding. The investors who take part of the equity in return or exchange of the cash become partial owners of the company limited to their stake.

As once, the operations of business take off, their customer starts to grow, they hit a break-point of their business model, and the demand surges up. They need more capital in order to hire employees, do thorough market research, and that’s when rounds of funding come into play. Thus, when you hear about Series A, Series B, and Series C rounds of funding, these are the terms used for expanding the business operation through outside (external) investment.

Every startup has different needs and so is the timeline of their funding, this is what sets them apart from each other. Some Businesses spend years struggling to convince the investor for a round of funding, while some just (a viable idea which can be revolutionary or some with a proven track record) may skip out some rounds and move through the process of raising capital more quickly. 

Note: Series of funding rounds of financing are the essential elements of the business, as startups cannot survive on bootstrapping and at the kindness of friends & family forever.

What do investors look for in the startup during Series of funding?

  • Objective & Concern
  • Management
  • Market Landscape
  • Scalability & Sustainability
  • Customers
  • Competitive Analysis
  • Sales & Marketing
  • Financial Assessment
  • Exit avenues

Rounds of Funding

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Before any rounds of financing for raising capital for the startup could begin, the prerequisite which needs to be done is the valuation of the company by a professional analyst. Now, Valuation is the most important factor, Valuation is derived from many different factors, including management, proven track record, market size & risk. The key differentiation between funding rounds has to do with the valuation of the business, as well as its maturity level and growth prospects. It influences the types of investors, which are likely to get involved and the reasons why the company may be seeking new capital. 

Pre-seed Stage

This is the earliest stage of funding & it happens so early that it is usually not seen or considered as a funding round at all. Commonly called Pre-seed Funding, this is the stage where the Founder has a vision/idea and is working on it consistently to bring it to life. At this stage, the amount of funds needed is considerably small. Furthermore, at the initial stage in the startup lifecycle, there are very limited and mostly informal channels available for raising funds.

The common way of raising Pre-seed funds is through the form of bootstrapping, from Friends, Family & Supporters. Some founders even opt to go through various Pitching events, Tech/business Competitions. Pre-seed is the funding stage which can either happen very early and quickly or may take quite a long time relying on various factors such as the nature of the company and the initial costs set up with developing the business idea. This is very likely that there is no investment in the exchange of equity in this round of financing. Founders are the sole investors & risk bearers.

Seed Stage

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A company that is first starting out may have limited access to funding and other sources. Banks and other investors may be reluctant to invest because it has no history or established track record, or any measure of success. Many startup executives often turn to people they know for initial investments—family, friends, Incubators, Venture Capital Companies & even Crowdfunding. This financing is referred to as seed capital. It is the official capital that the business raises outside of internal investments.

Many Companies even don’t go beyond the seed stage to Series A or more. For some limited business startups, a seed funding round is all that the founders feel is essential in need to successfully get their company’s operations off the ground; these kinds of companies may never engage in a Series A round of funding. 

This part of funding can be seen as the process of planting a tree, as the financial assistance received at this stage helps a startup to strive further to attract more financing. With the Go market strategy and a sound business model along with the support of investors, the little seed startup can eventually grow into a big tree.

At this stage, a startup has a prototype ready and needs to validate the potential demand of the startup’s a product/service. This is called conducting a ‘Proof of Concept (POC)’, after which comes the big market launch. The funding usually raised at this stage is utilized to do market research & Product development & determine what the final product will be and who the target customer is gonna be. It is also used to hire talents to assist and complete these tasks. 

A startup will need to conduct field trials, test the product on a few potential customers, onboard mentors, and build a formal team for which it can explore the following funding sources: founders, friends, family, incubators, venture capital companies, and more. One of the most common types of investors participating in seed funding is known as “angel investors”. Angel investors tend to invest in riskier business ventures and ideas in exchange for equity. 

Series A

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This is the Rounds of Funding, which is known as the early traction stage. At the Early Traction stage, a startup’s products or services which have been launched in the market show the Key performance indicators such as customer base, revenue, app downloads, etc. which are imperative at this stage, and thus startups opt for Series A to optimize their user base and grow them more, expand to new geographies, & product offerings.

The startup tries to scale its products across different markets. At this round of financing, it is quite important to have a viable business model with strong growth potential and a full-proof plan that will help to generate long-term profit. Usually, Series A rounds raise approximately $2 million to $15 million, this number increased on average because of high tech industry valuations, or unicorns. The average Series A funding as of 2020 is $15.6 million. 

Many startups during this stage, typically have a high cash burn rate due to consecutively spending on discounts, offers & rewards for customers to engage them more with the product plus have their feedback on the product to make it more appealing to them, thus eventually increasing the retention of the customers.

It is very usual for some startups to opt for crowdfunding other than any traditional investors for their Series A, companies do this for either of the two reasons. First, it is one of the most popular ways & thus reduces the overall liquidity of the equity. Second, many startups often fail to convince the investors for Series A even though they have had seed funding. Only fewer than half of the seed-funded business venture make it to series A.

Because at this stage of the Series of funding investors rather look for a strong strategy along with a business model to make it a successful money-making business. Most of the Series A startups come from traditional venture capitalists who invested in their seed round. In exchange for their investment, typical Series A investors commonly receive preferred or common stock of the company, deferred stock, deferred debt, or some combination of those.

The entire investment is premised on the valuation of the company, how much it is worth, and how that valuation may change over time. Most Series A investors are looking for significant returns on their money, with 200% to 300% not uncommon objectives over a multi-year period.

Series B

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Series B financing is the second stage of, Series of, Rounds of Funding for a business through investment, including private equity investors and venture capitalists. The Series B round generally takes place when the company has accomplished certain milestones in developing its business and is past the initial startup stage. It is the stage of a funding round that occurs once the business has shown its value out in the market, developed a substantial user base, steady revenue flow and is now ready to become even more successful than on a larger scale from before.

Series B investors usually pay a higher share price for investing in the company than earlier investors involved through the Series A round. This is to compensate for the risk borne by the investors from Series A, as this round tends to have less risk associated with it. Thus, attracting other VCs & private equity Firms. The capital raised during this round is mainly utilized for product enhancement and to make it a winning product to penetrate new markets, Hiring emerging talents for the company, Inventories, sales, advertisements, also professionals, legal consultants, heavy equipment, etc.

Series B investors typically prefer convertible preferred stock vs. common stock due to the anti-dilution feature of preferred stock. This happens because funds can be raised also by issuing more shares in the market, but this issuance of new shares will create a dilution of shares, this creates lower stock prices as investors see their ownership reducing becomes disconcerting for early investors. Thus eventually affecting valuation.

The average estimated capital raised in a Series B round is $33 million  Companies undergoing a Series B funding round are well-established, and their valuations tend to reflect that; most Series B companies have valuations between around $30 million and $60 million, with an average of $58 million.

Series C

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Startups who make it to the Series C of funding rounds are already successful with their business model in their niche. These companies look for additional capital in order to help them develop new products, expand into new markets, or even to acquire other companies. In Series C rounds, investors put funds into the loaf of successful businesses, in the hope to receive more than double of the amount back. Series C funding is focused on scaling the company, growing as quickly and as successfully as possible. 

As the operation gets less risky, more investors come to play. In Series C, groups such as hedge funds, investment banks, private equity firms, and large secondary market groups accompany the type of investors mentioned above.

The reason for this is that the company has already proven itself to have a successful business model; these new investors come to the table expecting to invest significant sums of money into companies that are already thriving as a means of helping to secure their own position as business leaders.

Most commonly, a company will end its external equity funding with Series C. However, some companies can go on to Series D and even Series E rounds of funding as well. For the most part, though, companies gaining up to hundreds of millions of dollars in funding through Series C rounds are prepared to continue to develop on a global scale. Many of these companies utilize Series C funding to help boost their valuation in anticipation of an IPO.

At this point, companies enjoy valuations in the area of $118 million most often, although some companies going through Series C funding may have valuations much higher. These evaluations are also founded increasingly on hard data rather than on expectations for future success. Companies engaging in Series C funding should have established, strong customer bases, revenue streams, and proven histories of growth.

Exit options

  • Mergers & Acquisitions

The investor may decide to sell the portfolio company to another company in the market. In essence, it entails one company combining with another, either by acquiring it (or part of it) or by being acquired (in whole or in part).

  • Distressed Sale

Under financially stressed times for a startup company, the investors may decide to sell the business to another company or financial institution.

  • IPO

Initial Public Offering is the first time that the stock of a private company is offered to the public. Issued by private companies seeking capital to expand. It is one of the most preferred methods by investors to exit a startup organization.

  • Buy-back

Founders of the startup may also buy back their shares from the fund/investors if they have liquid assets to make the purchase and wish to regain control of their company.

  • Selling Shares

Investors may sell their equity or shares to other venture capital or private equity firms.


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