Financing is essential in any business – it takes capital to develop great ideas and make a profit out of them. Startups in their beginning stage usually rely on the funding from close acquaintances, but eventually the time comes when they should look for external funding to assist the growth of the company. Series of funding rounds in letters are what they will encounter in this phase.
The purpose of naming the Series A, B, and C funding rounds is to rank payments to investors and ensure earlier investors receive preferential treatment. To secure their ownership interest, venture capital firms offer startup funding in exchange for company equity. Detailed explanation of each funding round is given below.
As you can guess from the name, seed funding represents the first official money that a business raise. This helps a company to finance its first steps like market research, product development, and employing a founding team to complete these tasks. With seed funding, a company gets to determine its final products and target demographic. Sometimes this process takes time, and a company may encounter the period called “Death Valley”, the span of time from its initial capital contribution to the point it finally begins generating revenue. Potential investors in seed funding are founders, family, friends, incubators, venture capital firms, and angel investors who tend to appreciate riskier ventures. A considerable number of startups remain in this seed round and never engage in Series A and later rounds, either because they feel it’s sufficient to get their business off the ground, or because they fail to scale up.
Once a startup has developed a track record with stable KPIs (key performance indicators) like established user base and consistent revenue figures, the company may proceed to Series A funding to further optimize its business. In this round, investors are looking for more than just great ideas, so it’s important to have a strategy and plan for developing a business model which will generate long-term profit. The investors of the Series A round come from more traditional venture capital firms. It’s also common for them to take part in a more political process. That is, a single investor may serve as an “anchor” to attract additional investors and lead the funding round.
Companies that have gone through previous rounds have already developed a substantial user base and proven to investors that they are prepared for success on a larger scale. Series B rounds are all about taking businesses to the next level, beyond the development stage. Series B is quite similar to Series A, often led by many of the same characters as the earlier round. The difference with Series B is the addition of a new wave of other venture capital firms that specialize in later-stage investing.
Businesses that make it to Series C funding are already very successful. Series C funding is focused on scaling the company, growing as quickly and successfully as possible. These companies may develop new products, expand into new markets, or even acquire other companies using the fresh funding. As the operation gets less risky with the proven business model, more investors come to play – hedge funds, investment banks, and private equity firms to name a few. Many companies also utilize Series C funding to help boost their valuation in anticipation of an IPO (initial public offering). Generally, a company will end its external equity funding with Series C, but some go on to Series D and even E rounds of funding either because they are in search of a final push before an IPO, or because they have not yet been able to achieve the goals of Series C funding.
Since valuation is a critical process in every funding round, startups should be ready for thorough due diligence. Keeping track of KPIs with necessary documents and going over simulations would help it. Also, investors from different funding rounds must be updated with appropriate reports. These tasks could be dealt with QuotaBook, making your fundraising much simpler. Let’s schedule a demo to discuss your needs and show you how we solve them.
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Disclaimer: This piece is written for information purposes only and is not intended as financial or legal advice. QuotaBook does not assume any reliability for dependence on the information provided above.