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Finance is a key issue for any startup. It is not easy to attract investment because of the high risks and the complicated process of launching startups. But wait, here’s another problem – to build the work with investors interested in your project in the right way. The division into investment rounds helps with this. At each stage, money is raised for clearly defined tasks. There are financing limits as well. Therefore, we made this article to address every seed stage that a startup might go through.
What are investment rounds and what are they?
Investment rounds are stages of fundraising for business development. There are 3 early stages of fundraising for startups – pre-seed, seed, and Round A. All other stages are late stages – they have letter names (Round B, Round C, Round D, etc.).
Why one should divide investing into several rounds?
The name of the round immediately indicates the stage of the business, which is convenient for startups and investors alike. Startups immediately understand which investors to approach and which not. And investors can focus on the segment of interest and not process unnecessary applications from irrelevant startups.
For example, if a startup is looking for seed financing, but sees that the investor is only focusing on investing in late-stage businesses (round B and above), there is no point in wasting that investor’s and their team’s time. It’s Matchmaking – look for those who are right for you.
Types of funding rounds
The initial seed stage of startup funding a new business occurs so early in the process that it is generally not included in subsequent rounds of funding. Often referred to as “pre-seed” funding, this stage typically refers to the period during which a company’s founders are establishing their operations. The founders themselves, as well as close friends, supporters, and family, are the most common “pre-seed” funders. This funding stage can occur quickly or take a long time, depending on the nature of the business and the initial costs associated with developing the business idea. Additionally, investors at this stage are unlikely to invesе in exchange for equity in the business. Typically, the investors in a pre-seed funding situation are the business’s founders.
When the MVP is launched and has begun to monetize itself, it’s time to think about seed investment. The very name of this stage speaks for itself: this is the seed, from which a good harvest is expected.
The key task of this stage is to find your product-market fit. Also, gradually scale your team and increase your sales and revenue KPIs. Keep in mind that all project seed funding should go into product growth and development, not into the payroll of business founders and co-founders.
Typically, seed projects seek the support of an investment angel, raise money on crowdfunding platforms, apply to incubators, or send information about themselves to investment companies that take the focus on supporting start-up organizations.
Investing in early-stage companies is the riskiest. Most startups “go bankrupt” in the first year of their existence. At the same time, if the idea is successful, the venture capitalist will get the maximum benefit from the deal.
Series A funding
As soon as a startup passes the seed stage, receives recognition from the audience, and begins to pay for itself, it is ready to attract the first series of investments. At this stage, many projects continue to fail. Even when the business is doing fine at the pre-seed and seed stages, a “first-round crisis” often occurs.
Keep in mind that only 46% of seed companies survive the next round of investment (CB Insights data).
Because in the first round we are talking about a much larger investment than in the initial stages (usually say amounts from $2 million to $15 million), investors will demand from the business proportionally more. By the way, a typical estimate for such companies is from $10 million to $15 million.
Most often, at this stage, it is possible to attract venture capitalists, who become anchor investors and take part in subsequent investment rounds.
Series B funding
A startup that is ready to pick up round B is a project that has a finished product and a loyal user base, but it’s realistic to scale.
Ask yourself if you can quickly increase the number of customers from 100 to 1,000. What if you could increase that number to 10,000?
Scaling up is not only about the number of consumers of the product but also about expanding the team. The startup team must be able to serve, please and listen to each new customer. At this point, the funder will no longer have time to “do everything at once,” and the bulk of his past authority will need to be delegated.
Series C Funding
Businesses that make it to Series C funding rounds have already achieved considerable success. These businesses seek additional funding to assist them in developing new products, expanding into new markets, or even acquiring other businesses. In Series C rounds, investors invest in the core of successful businesses in the hope of recouping more than double their investment. Series C funding is targeted at scaling the business, ensuring that it grows as quickly and successfully as possible.
One way to scale a business is through acquisition. Consider a hypothetical startup that is dedicated to the development of vegetarian alternatives to meat products. If this company raises a Series C round of funding, it has almost certainly already demonstrated unprecedented success in selling its products in the United States. The business has almost certainly already met all of its targets from coast to coast. Investors have a reasonable belief that the business will succeed in Europe as a result of their confidence in market research and business planning.
Perhaps this vegetarian startup faces a competitor with a sizable market share. Additionally, the competitor has a competitive advantage that the startup could leverage. The cultures appear to mesh well, as both investors and founders believe the merger would be a win-win situation. Series C funding could be used to acquire another business in this case.
As the operation becomes less risky, additional investors enter the fray. Series C investors include hedge funds, investment banks, private equity firms, and large secondary market groups. This is because the company has already established a successful business model; these new investors come to the table expecting to invest substantial sums of money in already thriving businesses as a means of securing their position as business leaders.
Typically, a company will conclude its external equity financing with a Series C round. However, some companies may qualify for Series D and even Series E funding. However, the majority of companies that raise hundreds of millions of dollars in Series C funding are prepared to continue global expansion. Numerous companies use Series C funding to help boost their valuation in preparation for an initial public offering. At this point, companies typically have a valuation of around $118 million, although some companies pursuing Series C funding may have much higher valuations. 4 Additionally, these evaluations are increasingly based on hard data rather than on expectations of future success. Businesses seeking Series C funding should have established, robust customer bases, revenue streams, and a demonstrated track record of growth.
Companies that continue with Series D funding do so either as a final push before an IPO or because they have not yet accomplished the goals set forth during Series C funding.
All in all, every seed stage in a startup has its own means and broad terms. Not all startups go through every round. Often rounds are combined or, on the contrary, intermediate rounds are singled out. The division into investment rounds gives an idea of the scenarios and dynamics under which startups develop. With that in mind, you can safely make your way towards the production stage of your digital product. However, what if you are completely new to the development of your digital product and are still getting around the correct path? What kind of IT outsourcing partner can you entrust your project to? Or moreover, what if you don’t know how to effectively put your investment to work.
If you can’t understand or determine how exactly you should spend your capital to reach your product’s full potential, then JetRuby is the right place for you. Specifically for young startups and beginning entrepreneurs, we created a unique program called the Design and Discovery Phase. Where we analyze your project, produce the correct estimate on your development plan, and analyze your product vision. All of that you can get on our business commercial service. Leave a short description of your business and schedule a call with us today!