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Fundraising terminology can be intimidating to newcomers, but it doesn’t have to be. Terms like “angel investor,” “startup,” and “series A funding” helps venture capitalists and other entrepreneurs understand:
- What stage of growth the subject company is in.
- The risk tolerance and expected return of the investors participating.
For example, if a startup CEO tells an investor at a venture capital (VC) firm “we’re preparing for a Series A round,” that investor can make a rough assumption of how much the company is worth, how much they plan to raise, and what to look for in due diligence. If a VC firm says they’re interested in Series C investments, a startup CEO may believe that the firm wants to assume less risk by investing in a company further down the process and already performing well.
Let’s dig into Series A funding to better understand who the players are and how it works.
Series A Funding
Since “A” is the first letter of the alphabet, you might assume that a Series A round is the first money a company raises. This isn’t usually the case. A company might raise money from friends and family early on, or from startup incubators and angel investors (individuals or groups investing their own money) as the company gains traction.
Seed or Series A fundraising is typically when venture capital firms get involved. VCs deploy a fund of money to higher-risk, high-return investments. They do their due diligence, inspecting financials, operations, and market data. Still, since many startups fizzle out, series A investments are still too risky for the open market. VC firms run on passion and belief as much as they do on bean-counting. The investor has to believe in the startup’s vision, and that the startup CEO can execute on that vision.
One firm or individual might serve as the anchor or lead investor in a funding round. Their credibility and advocacy may attract other VCs to the investment.
How to Get Series A Funding
There is no easy answer to how to get Series A funding, but start here — the company seeking funding has to be ready for it. Companies in search of Series A funding need a substantial track record. Consistent revenue, an established user base… something that VC investors can hang their hat on as proof of the company’s concept. VCs want to see more than just a great idea before making a Series A investment. They want to see a plan for long-term profitability. They want their investment to grow exponentially.
A credible company in search of Series A funding is worth, on average, between $2 million and $15 million. That said, a company in the midst of a Series A funding round could be worth substantially more than that, given that some tech startups take off like wildfire. Some startups that are valued at more than $1 billion are known as unicorns. Tech unicorns are more common than ever.
“Pre-money” (that is, before the funding round) Series A valuations have trended up in recent years.
- Pre-money average Series A valuation 2016: $5.9 million.
- Pre-money average Series A valuation 2017: $7.6 million.
- Pre-money average Series A valuation 2018: $8.1 million.
- Pre-money average Series A valuation 2019 (Q1 and Q2): $8.9 million.
Professional analysts perform the official Series A valuation based on management, assets, revenue, etc. Series A valuation calculators can also be found online.
A successful Series A raise can result from a startup leveraging or expanding its network in the VC world. Promotion is often a key factor in the success of a fundraise. If a startup makes headlines, VCs may come knocking, offering to anchor the raise. Once the money is raised, the company is expected to deploy it to the plan of optimization to increase revenue, market share, client base, and operations. In exchange for their investment, funds, firms, and individuals receive common stock, preferred stock, deferred stock, deferred debt, or some combination thereof. Most noted names in venture capital invest in Series A rounds.
Average Series A Funding
The Series A round is not for “bootstrapping” a company up from nothing. It is typically measured in millions of dollars. The average Series A funding used to fall between $1 million and $2.5 million, but recent rounds have inflated in the boom of high-value tech companies and unicorns.
- Average Series A Funding 2011: $5.1 million.
- Average Series A Funding 2014: $9.8 million.
- Average Series A Funding 2018: $15.7 million.
Funding Rounds Explained
Funding rounds exist to provide growing companies with access to the outside capital they need to grow faster. There are few hard-and-fast rules, but typically the stage of funding indicates the stage of growth the company has attained, the risk profile of the investment, and which investors are likely to participate.
Startup Funding Stages
The startup funding process may start with pre-seed funding, usually consisting of the founder’s personal funds and contributions by close friends or family. No company milestones have been met. All that exists is an idea and the founder’s passion.
The seed round of funding may also involve personal or close-network funds, but outside investors may become involved as the project shows signs of life. Players who may become involved in seed funding for a startup include:
- Incubators. Startup incubator firms don’t just source funding. They also nurture nascent businesses, providing logistical and technical support to build out the companies’ architecture.
- Angel Investors. Wealthy individuals or groups of individuals, angel investors put money into passion projects in very early stages. With a little money in many startups, they can usually risk a total loss on any of them on the chance of a massive return on the one idea that hits.
- Venture Capital Firms. Venture capital funds do participate in seed funding, but this is the riskiest round for them to participate in. Many companies fail even with significant seed funding.
Series B Funding
Many successful companies never surpass their Series A or even their seed rounds. This early funding is all they need to get off and running.
However, a growing company interested in boosting itself past the development stage may seek Series B funding. Series B startups have a substantial user base and a proven business model. One of the key Series B milestones is a company valuation of between $30 million and $60 million. Of course, companies with much higher values might also seek Series B funding.
- Pre-money average Series B valuation 2016: $46.0 million.
- Pre-money average Series B valuation 2017: $59.5 million.
- Pre-money average Series B valuation 2018: $69.8 million.
- Pre-money average Series B valuation 2019 (Q1 and Q2): $69.5 million.
Traditionally, the typical Series B funding amount ranged between $7 million and $10 million. As with Series A rounds, the Series B funding average has trended up in recent years.
- Average Series B Funding 2011: $14.8 million.
- Average Series B Funding 2014: $24.7 million.
- Average Series B Funding 2018: $30.7 million.
The same VC players may get involved in Series B funding, although some more risk-averse funds may get involved.
Series C Funding
Even fewer companies proceed to Series C funding, a round typically reserved for businesses that have achieved significant success. A company’s Series C round might allow it to:
- Develop new products.
- Grow as quickly as possible.
- Acquire other companies to expand vertically and absorb the competition.
- Attract an acquisition of its own.
- Boost valuation in advance of an initial public offering (IPO) of stock. Series C rounds typically go to a company with a valuation of at least $100 million.
Since the company is already successful, more investors may come into play, attracted by the lower risk profile. Nevertheless, even with a proven track record Series C funding is riskier than investments approved by the Securities Exchange Commission (SEC) for the general public. Commensurate with the risk, investors hope to double their money or better fairly quickly.
Series D Funding
A company’s venture funding typically ends at Series C, if not sooner. The next step is usually an IPO.
Companies may consider Series D funding rounds for several reasons:
- They need that final push before an IPO.
- An unexpected avenue to greater profit is discovered to be achievable before an IPO.
- Series C goals were not met and the company needs an infusion of cash to get back on track.
No meaningful average Series D funding figures are recorded since the funding rounds are so rare.
Series E Funding
If Series D rounds are rare, Series E funding is even more uncommon. The reasons companies pursue Series E funding good or bad, include:
- Series D did not go well and the company needs to get back on track.
- The company needs more help before the IPO.
- The company needs more funding but does not want to go public.
Series F Funding and Beyond
Fundraising a Series F round is very rare. A company seeking a Series F round probably intends to stay private. Fundraising rounds could technically continue on to Series G and beyond, but that is very rare. Alternatively, a company requiring additional funding may consider a private equity round. Ultimately, the more funding rounds a company has, the more diluted the owners’ and investors’ shares in the company have, which means less value for owners.
Additional Funding Rounds
Theoretically, no limit exists to the number of funding rounds a company can initiate (except maybe for the number of letters in the alphabet). Still, as the company becomes more and more established, investors may wonder why no IPO is happening if such a stable company really needs the money to grow. Venture capital may move on to shinier, riskier new deals with more potential for explosive growth. Once a company’s stock is so low-risk that SEC approval is in the offing, an IPO opens the company up to a flood of money from new investors, making it the most efficient way to grow the company.