When it comes to startup funding, there are numerous ways to raise money. More so, there are numerous times in a company’s life when they may seek capital. To make sense of the when and why of a company’s raise, there’s a standardized approach to naming the different “rounds” of funding a startup typically goes through.

The name of each round of funding gives hint to the infancy—or maturity—of a company and helps investors justify the amount of capital a company is asking for versus what they’re willing to invest into it. But it can be jargon for the everyday investor who sees headlines with the words 'Pre-Seed', 'Series B' and 'Headed for IPO.' What do they even mean?!

This blog post will go over the most common rounds of startup funding so that you can read stories of funding success with less confusion and more clarity.

Pre-Seed Funding

Think of a business like a tree. Before it gets a strong trunk and sprawling branches, it needs to be planted. And for a seed to successfully sprout, it needs the right conditions. Pre-seed funding is setting up those right conditions before a business can truly begin.

Pre-seed funding is the capital collected to help a startup in its earliest stages. Sometimes referred to as a “Friends and Family” round, during this stage of startup funding, a founder looks to those closest to them to help bring an idea to life. More often than not, it includes a founder’s own money as well—and sometimes, it consists of just the founder’s money.

It’s usually used towards developing a business idea, getting operations off the ground, and seeing if the founder has a viable idea. A business doesn’t necessarily need a minimum viable product to raise pre-seed funding, but the money should go towards creating one before moving on to seed funding.

Typical amount raised: $10,000 to $250,000
Valuation of the business: Undetermined

Seed Funding

29986 conifer 1134 1 20220118150210854Now that the conditions are favorable, seed funding helps a startup “plant” its seed of a business idea and “sprout” into its next stages as a sapling. Seed funding is usually the first round of funding that seeks external investors, like angel investors or venture capital (VC) firms.

Another popular form of seed financing comes from participating in an accelerator program, which can not only provide the mentorship, networking and guidance a founder needs to succeed but access to funding.

By seeking external investors—who typically have more money to give than the average friend or family member—this stage of funding advances business operations. Investors at this stage are interested in the vision and idea that a founder presents. Money can go towards things like extensive market research, product development and hiring a team to bring the business to life.

With seed funding, a startup can begin to see real traction and growth and work towards making a name for itself in its respective market.

During a seed fundraising round, a business typically gives up equity in their business in exchange for capital. This means that investors are betting on the business becoming successful to see their return through either an acquisition or IPO (more on this later).

Typical amount raised: $250,000 to $2 million
Valuation of the business: Usually between $3 million and $6 million

Series A Funding

Once a company has a proven track record of success, it may look towards another round of funding to help expedite its growth. This is where Series A funding comes in. Think of it like the necessary factors that help a tree further establish its roots and stand tall: sunlight, water, fertile soil.

Series A funding is meant to go towards helping a business secure long-term success. Whether that be by putting a strategy in place to increase the number of users or product offerings, or building out a larger team that’s more capable to scale.

This startup funding round is usually done by venture capital firms, that are seeking companies that they believe have a strong chance of success, and subsequently, a strong chance of a big return. Angel investors may still participate as a business sees fit, though their overall influence and ability to fund the round greatly diminishes as the goal amount of money raised is usually significantly more than during seed funding.

Given the stakes—and the amount of money a startup is usually seeking—VCs will require more information than usual during a process called due diligence. While seed funding may place its bets on vision and the willpower to see it through, Series A funding requires the numbers to back up a startup’s claims.

This stage of funding has also become a popular time for startups to seek funding through equity crowdfunding. This can be done for a number of reasons, including wanting to loop in business brand champions on the opportunity to invest in the company or if there’s hesitancy from traditional funding options while retail investors in the private markets believe in the future of the business.

It should be noted that not all companies even complete Series A funding. Sometimes, seed funding is all that’s needed for a company to find its own legs and stand on its own to turn a profit. However, if a company does raise a Series A round, they’re likely exchanging equity for capital, like with seed funding.

Typical amount raised: $2 million to $15 million
Valuation of the business: Usually between $10 million to $15 million (some up to $23 million)

Series B Funding

If a company is well-established but looking to expand its reach, it may seek another round of funding. Continuing the alphabet, Series B funding provides a business with the capital needed to broaden its hold on the market. Going back to the tree comparison, consider this funding round (and the ones that follow) as continuing to provide the necessary conditions that give a tree its strong trunk and firm roots, allowing it to grow in size and strength.

This can include increasing business development, technology, sales, and marketing capacities; all of which need the talent to fill roles. With this round of funding, you can expect a startup to greatly increase its employee size with the intention of also increasing its overall user base and capabilities.

During Series B funding, key venture capital firms that invested in Series A will usually come back. Though, investors more experienced with later-stage financing will also come in at this point. They will also continue to expect equity in exchange for their investment.

Typical amount raised: $10 million to $40 million
Valuation of the business: Usually between $30 million and $60 million

Series C Funding

Seeking Series C funding means a business has reached a level of success that many others only dream of. By now, most businesses will prove to be profitable and be able to stand on their own without external support. However, Series C funds are necessary when a business aims to accelerate in ways not previously exercised, like planning to acquire smaller competitors or going global.

Series C funding typically comes from late-stage VC firms, hedge funds and investment banks. Given a business’s track record of success to reach this round of funding, these financial backers have much more confidence in said startup and are happy to provide capital to a market leader.

Though this round of funding is typically a company’s last before seeking an initial public offering (IPO), some startups will continue to raise money with Series D, Series E, and so on, with the intentions of continuing to scale or increase their valuations before an IPO.

As equity crowdfunding continues to grow in popularity, founders may look at these later rounds of funding as a way to reward their users and brand fans with a stake in their companies, like this fintech company didwhen it set aside US$5 million for retail investors to raise after its Series B round.

Typical amount raised: $50 million+
Valuation of the business: $100 million+

29986 conifer 1101 2022011815000929329986 conifer 1101 20220118150036121IPO

Of course, all of this raising money (and investing money) hopes to lead somewhere. As mentioned, most investors during startup funding are investing and taking equity in return. This means that they’ll only see a return if a company either gets bought, aka acquired, or goes public on a stock exchange, aka an IPO.

An IPO, or “initial public offering”, is the process of transitioning a private company to the public stock markets, allowing the company to raise money from public investors. By becoming a public offering, those early-stage investors have the chance to realize their returns from their initial investments.

To successfully IPO, companies work with an investment bank to walk them through the process, including deciding the IPO price and date, marketing the offering, and filing for an IPO with the respective securities regulators. It can take anywhere from six months to over a year to complete.

If successful in listing, the once “startup” can now count itself amongst the thousands of companies that are publicly traded.

And, if we’re sticking with the tree analogy, at this point, an IPO is the tree standing firm and tall, sucking in harmful CO2 and breathing out oxygen, and providing the public much-needed shade and shelter.

What does this mean for you?

Assuming you’re reading this article as a retail investor, this mostly relates to you through equity crowdfunding. If you invest in a company in the private markets, you’re taking part in one of these rounds of funding hoping to lead to either an IPO or an acquisition.

Like any form of investing, a return is not guaranteed, though here at FrontFundr we have seen success for a number of our companies, including a public listing of Very Good Butchers and partial acquisition of HTEC to name a few.

When you invest in the private markets, think of yourself as a helping hand, nurturing a mere seed into a strong and sturdy tree.

Graphics by Elizaveta Guba from Ouch!

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