“I’m new to the startup world, can you explain the different vc rounds of funding?”
This was one of the first questions I asked when I joined some of the startup communities here in my town.
I was constantly hearing about founders reaching certain levels of funding and not truly understanding the difference between seed rounds and series-level rounds and why any of this even matters.
Since I am a new learner in the startup and investing world, I want to create an article that I believe will explain what I have learned in the simplest way possible.
If you are like me, you may not care for the in-depth details found in other posts online, so this list excludes any filler and only explains the most important information you need to know.
In just 5 minutes, you will learn all the different rounds of funding in the venture capital world.
What Is Pre-Seed Funding?
Pre-seed funding consists of small investments intended for development purposes.
Startups at this stage typically have little to no customers and are just getting their idea off the ground.
This is arguably the riskiest investment to make as there is typically no product or results to show for, and thus the typical investors in this round are usually friends and families, angel investors, or startup accelerators.
Businesses at this stage typically devote their time to the following activities:
- Market Research
- Building Prototypes
- Bringing In Critical Team Members
- Product Development
What Is Seed Funding?
Seed rounds can range from 100k to a few million dollars depending on the startup.
This capital is used to get the product out there and find a good product-market fit.
The starting team can use this early round of funding to learn how their product or service fits in the market and optimize their offering accordingly.
The main players again that contribute to funding in seed rounds include angel investors, venture capitalists, and startup accelerator programs.
What Is Series A Funding?
Now, we move on to the big leagues.
Series A funding can range from $2 million to $15 million and is focused on growing the revenue of the business.
This is where investors and business owners will look at their sales initiatives in order to gain more customers and they will work to evaluate and optimize their offerings, user base, and business model.
Unlike the previous seed rounds, series-level funding will include more rules and regulations as venture capital firms typically provide their support and expect the company being funded to reach certain milestones throughout their growth.
Startup founders can expect to give future projections of the number of customers they plan to obtain and the strategies they will employ to ensure that they hit their growth targets.
What Is Series B Funding?
With Series B funding, the business that is being funded has already shown sustainable growth with a large user base and have proven that they are ready to expand their market reach even further.
Funding at this level is typically given to further expand the current business team and find experienced talent to onboard.
Investors and business owners will work together to further optimize their marketing, sales, tech, support, and other areas of business to be primed for further market reach.
According to Investopedia, funding at Series B can range in the tens of millions of dollars as companies are often valued at 30 to 60 million dollars at this stage.
Series B funding follows similar procedures as Series A, but involves additional institutional investors to grow further.
What Is Series C Funding?
Companies that enter a third round of funding have proven to be successful in reaching previous milestones and investors are now usually focused on long-term expansion.
This additional round of funding may be used to help develop new products, improve on existing products, or reach new markets.
In addition to this, Series C funding may also be useful if the business being funded would like to acquire another company such as a direct competitor that they believe may have a culture and competitive advantage that will help grow the business.
Because companies at this stage have proven substantial success and are believed to be successful in the long run, other institutional investors like hedge funds, investment banks, private equity firms, and more tend to offer their financial support as well.
Companies at this point can be valued close to the $100 million mark and funding at this level is drastically higher than previous rounds since large players are now on the team.
Funding at this stage could be in the hundreds of millions of dollars.
At this point, businesses will either prepare for an IPO or will go on to Series D or E, but these stages are really to prepare the company for an IPO as well.
Overall, startup funding can get a bit confusing for first-time entrepreneurs.
The goal of this article is to provide the simplest read for people to quickly scan to figure out what each stage of funding means and what it typically represents.
If you are a new entrepreneur looking for funding, check out our previous article here that can help you find the best resources to grow your business to eventually reach the rounds listed above.
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