Stages of Startups Fundings – Series A, B, and C Fundings & it’s Working
A start-up demands much more than just a great idea, it demands a lot of time, discipline, and dedication but most importantly funding. A survey conducted by the British Business Bank in 2016 highlights the fact that more than 60% of start-ups require external funding rounds to establish a firm ground to build upon.
There are five stages of start-up funding that every entrepreneur needs to know to establish a prosperous business.
The seed round was considered to be the first round of money fundraising that a newfound business would need to acquire but the competition within the market place has become fiercer than before.
This has led to the idea of pre-seed financing rounds, it involves a company proposing the specific milestone that the company needs to accomplish before it’s ready for further larger investments. These normally involve a prototype product and hiring necessary team members.
Pre-Seed financing is often used as a bridge to fill the gap to the next round of fundraising, it usually comes in three main ways.
- Friends and Family: The people who support your idea and believe in your dreams your friends, family, and relatives even some friends on Instagram who want to support your project and are always ready to through money your way.
- Business Angels: Angels come in all guises and in an entrepreneurial world they are the ones who have money of their own and are willing to invest in a new start-up. They might have experience in start-ups or risk-takers and willing to invest in a project when ROI (Return on Investment) isn’t guaranteed.
- Accelerators: are the organizations that offer advice and capital, mentorship, and often a working space in exchange for equity between 5 to 10%.
Average Funding Amount- $1.7 million
When a company is looking at product development or even potentially generating income and is ready to move beyond just having its founders, it is when the Seed funding round starts.
This kind of Seed investment shows the potential of a company’s growth either in terms of customer base or month to month revenue growth and means that the business idea shows a great Product and Market Potential and scope for traction.
Because of the increase in the entrepreneurial ventures and the success of most of the investors now extend beyond Business Angels and Venture Capital Funds get involved and increases the amount of investment money. One of the largest Seed round was in 2015 worth 10 million dollars.
There is a huge range of Seed investment sizes which all depends on who is investing.
- The average median Business Angel funded seed size is typically around $150,000.
- The median Venture Capital (VC-led seed size is usually around $1.5 million.
Average Funding Amount- $10.5 million
When a start-up makes its way to Series-A, it is expected to have significant revenue growth from new customers and also an increase in the Average Revenue per Account (ARPA).
The aim of Series-A is only to ensure that the revenue growth for the start-up is set to continue.
Until this point, start-ups are only on a single channel without any complex sales, marketing processes, or new channels. In Series-A marketing and sales becomes a major focal point for the start-up to understand their customer base, develop new sales, marketing processes, and identify growth opportunities across different channels.
At this point, Business Angles makes way for Super Angels. However, it’s typically the Venture Capital (VC) Organizations that front the money for start-ups to expand. This is why series-A rounds are increasing in size, as they are not reliant on single financer anymore.
Average Funding Amount: $24.9 million
From Pre-Seed to Series-A is about mastering the art of the start-up but by the time Series-B comes around the product is expected to have a product or a service that can work when it is scaled up. The start-up should know what’s weaknesses and strengths, what it does well, how to do it well, and where they want to take this.
Depending on the business or the services the start-up performs, this is the point where start-ups are expected to be able to reach out to different market segments. And also the time for hiring, the company will be looking at hiring business development roles, marketing, customer success posts and strategic account hires.
In some cases, the revenue streams may diversify or a start-up might even consider buying out other small business ventures which helps them maintain their competitive advantage.
Series-C and Beyond
Average Funding Amount- $50 Million
By the time a start-up gets to Series-C funding, it is looking at a dramatic increase in expansion. This can either mean moving into international expansion or taking over other businesses to broaden their offerings and reduce competition.
When it comes to start-ups very few companies are able to make it to Series-C. Theoretically, the funding rounds could go through series D, E, F, and beyond. However, by this point, the start-up normally has proven its financial viability enough to encourage financial institutions to be involved in investments.
This increases the amount of money a start-up experiences for investments by an astronomical amount. A “cinematic reality” company called Magic Leap raised 793.5 million dollars in 2016 for their Series-C funding making it the biggest round of investment in VC history.
From this stage for many start-ups, the out-come tends to be an Initial Public Offering (IPO) or either for them to be acquired a bigger company for a much bigger amount.