The process of receiving funding for your company can be highly intimidating. While many startup companies have the ability to solicit investments in the community, others rely on venture capital funding and angel investors. At the very beginning of the funding process, startups engage in “seed” funding or “angel” investor funding. These funding rounds are often followed by Series A, B, and C rounds, as well as other efforts to earn capital.
Series A, B, and C rounds are necessary for companies that can’t survive off the generosity of family, friends, and their own savings. This article will take a close look at these funding rounds and how they work. Dan Lok, a business expert, explains how the three rounds of funding form a coherent process for getting your business off the ground.
Explaining the Different Groups
Before understanding Series A, B, and C funding, startup owners need to know who the participants are and what their roles can be in the funding process.
The first group are the startup company owners themselves. As their enterprise becomes mature, they advance through the various rounds of funding. It is most common for startups to begin with a seed round and then continue through steps A, B, and C.
The second group is potential investors. While investors genuinely want to see new businesses succeed, they also want to gain something from their investment. For this reason, investing in a startup company generally involves some kind of partial ownership of the company. If the company earns higher profits, the investor will be able to reap greater benefits.
Before funding begins, analysts need to do a valuation of the company. Valuations rely on many different indicators. Some of these indicators include management, track record, risk, and market size.
In the earliest stages of funding a new company, money generally comes from friends, family, supporters, and the founders themselves. This funding stage could be over quickly, or it could continue for a matter of years. Friends and family generally do not look for a stake in the new company as a reward for their investment, though they may expect to be kept in the loop regarding financial decisions.
Seed funding is the first official funding raised by a business venture. Many companies do not have to move past seed funding and into the A, B, C series.
Seed funding finances the company’s first steps. This includes activities like product development and market research. Seed funding can help a company determine what its final purpose can be and to find its target demographic. Seed funding helps a company find the core managerial team that will accomplish these goals.
Different groups that could be involved in seed funding include friends, family, incubators, and venture capital companies. “Angel investors” are important at this stage. They often fund startups with little to no track record and expect a higher proportion of a stake in the company’s success as a reward for their higher risk.
Seed funding may produce from $10,000 up to $2 million depending on the size of the business. Some companies never need to move past the seed funding stage, but many companies find it necessary to seek more investments.
Series A Funding
Series A funding happens after a business has developed a positive track record. This includes factors like a good user base and solid revenue. Companies that want to participate in a Series A funding round need to have a workable business plan that can generate a long-term profit.
Seed startups may have a great idea, but they may not know how to translate this idea into sales figures. Series A funding targets companies that know what they are going to do with their funding and how they are going to make money in the future.
Series B Funding
Series B funding involves taking the business past the initial stages. This round helps companies expand their market reach. If a company has completed both seed and Series A rounds, it already has a good user base and a proven track record of success. Series B funding helps companies build on this success for the long term.
Series C Funding
If your business makes it to Series C, it will already be successful. These businesses are in search of extra funding that will help them expand or develop new products. Series C investors expect to receive double their money back.
Hedge funds, private equity firms, and investment banks may be involved in this round of funding. This is a marker of the company’s success since these entities will not look at companies that have not already made a name for themselves.
Funding Your Startup
When your business has passed the seed stage, you may be interested in moving forward with Series A, B, and C funding. Companies need to present themselves in the best light to potential funding sources and prove that they have the ability to make money with their ideas.
Dan Lok believes that many startup companies should consider moving forward through the various stages of funding. Funding can increase a startup’s chance of success and help them achieve unique results.