Raising capital for your startup is a complicated process. In most cases, entrepreneurs need to work really hard in order to overcome the challenges associated with completing each round of funding.
Unless you are already immersed in the world of finance, figuring out how much funding you’ll need to raise can be quite challenging. Given the huge amounts of capital involved, it can be very difficult to even make sense of it all.
Rather than getting bogged down in the details for your particular startup, we’ve put together an overview of each startup funding series so that you can understand what’s involved. Here is a brief guide to help you understand the startup funding stages.
Series Seed
The purpose of Series Seed is for a company to figure out what it wants to sell, the market the company is in, and the user base for the product. Typically, Series Seed allows companies to begin to hire their first few employees to launch its initial version of a product.
According to CrunchBase, the average seed round size for the first half of 2016 was $1.14 million. California accounted for the highest portion of seed funded companies at 817 with New York, Texas, and Massachusetts firms rounding out the top four states. Angels, SuperAngels, and venture capitalists may opt to invest in seed rounds.
Series A Funding: Optimization
Series A funding is generally sought after you have figured out your product and user base. The capital from this round of funding is used to figure out or scale distribution, scale your business geographically or across verticals, and figure out a business model.
Traditional venture capital firms are typically involved in this round of funding. As of February 2016, the mean deal size was $7.8 million, according to data compiled by CB Insights.
In some cases, startup founders are given the opportunity to skip seed funding to go directly to series A. Even if you have this option, it may not be a good idea to skip it for the following reasons:
- Get access to a large network and resources. Seed rounds tend to have many players, including angel investors and institutional seed funds. Given that other rounds of funding require larger funds, it is less likely that you will have as many investors ready to help your startup.
- Buy time to find the right series A firm. When you take advantage of the seed rounds, you’ll have more time to really investigate the firms that you might want to work with for series A funding instead of having to jump onboard with the first “premium” firm that is willing to work with your business.
- More time to develop your company. Skipping rounds of funding could cause you to push your company in a direction that it wouldn’t otherwise go naturally. That could increase the risks of your business by causing you to ignore factors, such as a product that is harder or takes longer to build than expected, that could potentially hinder your business long term.
Series B Funding: Build
The next phase of funding, Series B is all about scaling up the business. A startup that is ready for series B already has a business model that has gained tractions with users. At this stage, companies need to utilize capital in order to hire a bunch of employees or expand their user base to take advantage of an opportunity in another market.
In some cases, Series B funding is also used to buy other companies. While the same firms are generally involved in Series B funding as Series A, in some cases additional firms that prefer to invest in later stage deals are involved. Series B funding amounts vary greatly depending on the company involved but generally are in the range of tens of millions.
Series C: Scale
Series C funding rounds are designed to encourage a company’s rapid growth. It is used to earn greater market share, continued acquisitions of other companies, or to scale up and develop new products. These investments are generally much larger than the other rounds of funding, exceeding $30 million in most cases.
If you want to learn more about the dollar amounts of funding that various companies have managed to raise in each series, Crunchbase offers a comprehensive database of companies, investors, funding rounds, and acquisitions for your review.
Beyond Series C
Some companies go well into the alphabet with additional rounds of funding after Series C. These rounds of funding may also be in addition to lines of credit obtained from commercial lenders to enable the day-to-day operations of the company.
With each round of funding, your startup will be revalued with investors being issued shares in your company. As your company matures, the risk profile changes and investors may have different demands for the performance of your company.
Generally, the progression of these rounds is taken as an indicator that the company is progressing as expected. However, investors often become concerned when a company has raised too much money from too many rounds of funding. This is considered as a sign that the company is experiencing delayed progress.
Develop a Winning Plan to Secure Investors
If you are considering raising money from investors to help grow your startup, first you need to decide on what resources you will need to achieve your goals at each stage. If you need help with refining your app business model or scaling your product so that it meets the expectations of potential investors, Achievion Solutions can help. Contact us for a free 30 minute consultation and let’s discuss your vision.
