In our previous article, we discussed the various types of startup funding that new companies can apply for. When reading the news, we often come across articles of certain companies obtaining Series A funding, or perhaps seed funding. Have you ever wondered what these letters meant? In this article, we will dive further into the different Series Funding Rounds, and what each round entails for the startup.
What are Series Funding Rounds?
Throughout the journey of starting a business, many startups will go through various funding rounds in order to raise capital. In the different rounds, money is exchanged directly for the equity of the company. These funding rounds are seen as necessary to improve the company and take it to greater heights. One of the major differences between the funding rounds is actually the valuation of the business, as well as its potential and maturity level. Here are the different funding rounds and what they mean for the startups:
Although this is the very initial stage of funding, not every startup will require this step of funding. Furthermore, this stage of funding is only sufficient to grow the company just a little, for example by hiring a new team member or creating a prototype. As such, the average amount of funding for this stage is below $1 million and can go as low as $10,000. As the startup is at an early stage, be cautious when requesting for large amounts of capital and do not overpromise investors. A higher capital amount will often mean that investors will expect a larger return on equity.
We frequently hear the term “seed funding” when looking for startup capital. This is because this round of funding can be an important stage as it allows the startup to grow further and reach a point whereby they can continue to raise additional funds independently (via Series A, B, and C). When receiving funding from angel investors, startups can expect around $50,000 to $200,000. However, venture capital firms may provide around $1.5 million. Before accepting any funding, do take note of the expectations and requirements that come with it.
- Series A
In order to acquire Series A funding, the startup needs to have an in-depth and detailed business plan. The startup needs to know where it is headed and that appropriate research has been done to show that there is potential for exponential growth. Unlike Pre-Seed and Seed Funding, Series A focuses more on the potential growth of revenue and profits. Investors will be keen to find out more about how well the product fits into the current market, and whether customers are really interested in it.
Series A is often the most difficult stage to get through. This is because it is extremely challenging to convince investors of the startup’s business plan. However, if investors are convinced, the approximate investment amount involved slightly exceeds $10 million. At this point, the valuation amount of the startup could range from $10 to $30 million. Getting through Series A usually means that the startup has a higher chance of success.
- Series B
With an established and interesting market base, startups look for Series B funding. This round of funding is used by startups in order to continue expanding their company staff and customer base. Once it is proven that the startup is able to bring in revenue, use the current cash flow carefully to grow the company. With Series B investment, consider hiring more employees with different specialisations. This could help to expand the startup into different market segments, which could in turn increase its customer base.
The average capital provided during this stage ranges from $15 to $25 million. Do note that previous investors may choose to reinvest and allow the startup to reach greater heights at any stage. The valuation amount of the startup should be about $25 to $60 million, depending on the results of Series A growth.
- Series C
For startups that are doing well, Series C funding is needed to expand into new markets in other countries, develop new products, and acquire new businesses to increase their global reach. Some startups may also hope to increase their valuation to sell the company or to go public. This is often the last stage of raising funds for many companies.
The approximate investment amount for this stage is around $50 million. However, this amount may vary from company to company as it depends on how well the startup performed in Series A and B. Typically, the valuation of the company would be about $100 to $120 million.
- Series D
If the startup did not manage to expand enough in order to his its target growth potential, the company may seek Series D funding. There are times whereby the company does not want to be acquired or wants to stay private. It is uncommon for startups to make it to this phase of series funding.
- Series E, F, G, H & Beyond
Lastly, a handful of companies will make it to Series F, G, or H funding. These stages of funding are uncommon. The reason why startups look for this stage of funding is similar to Series D 一 that the previous funding stages were insufficient for the company.
Reaching this stage may simply mean that the startup is not prepared for an IPO or being fully independent. Due to the Covid-19 pandemic, more companies have entered later stages of funding in order to ensure their survival during difficult times. Although entering into later stages of funding may seem discouraging, remember that companies in different industries, such as financial services, may require more capital to take off.
Raising funds for each round is not easy. As such, before raising a round, have a cohesive business plan to let investors know how the funding will be used. For example, split the costs up into operations, salary, research and development, and so on. With this plan, startups will be able to estimate their burn rate, which refers to approximately how long this amount of funding can last.
When planning the amount to be raised, be careful not to inflate the valuation of the startup too much. This is because investors may view the high valuation amount with resentment if the startup does not produce the desired results, in the form of growth rate or profits. Furthermore, this would affect the subsequent funding rounds as due to the need for traction, startups may find it more difficult to attract interested investors.
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