The 1–2–3 of investment series
If you’re an idea person, the startup world can seem like a daunting place once the conversation turns to numbers. And while relying on experts is the way to go, it is fundamental to understand what is happening to be a part of the conversation. Fret not, this is your very basic introduction to investment rounds.
First things first, the investment series are not a quality descriptor of your business, rather where your business it at that point — early stages, developing, etc. Each series has its own learning curve, regarding what works and what doesn’t, both for you and your investors. And there are certain steps repeated: doing background checks on your investors, knowing how to concisely and clearly present your company, maintaining (and improving along the way) your business plan.
While it can be confused with early stage funding, seed funding is the very first funding round. Seed and early stage funding are not interchangeable. To receive early stage funding, you have to go through the seed funding period.
During the seed period, the startup will be able to take its product or service off the ground and into the market. Since this is a trial and error process, it’ll be necessary to have multiple seed funding round. And though there are no limits to how many times you go through seed funding, it’ll be a reflection on the scalability of your startup.
Seed funding works for making your product or service a reality. You get to work out the kinks, see what works (or doesn’t) in your marketing strategy. In this round, most investors tend to be angels investors, whether professionals angel investors or family and friends. It’s very rare for professional investors, such as venture capitals (VCs) to be involved at this point; though it has happened.
This stage will also help start a team. Whereas before you were a another person with an idea, now you’re a founder looking for professionals to make your company a reality.
Early stage funding starts here, at Series A. Once you start this series, your startup has blossomed into a promising company. Now, you know more about your product and have a clearer picture of your user base, so it’s time to improve and grow.
Though angel investors may still be involved, once you get to Series A, VCs, and other private equity investors enter the game. And they will have more requirements: the product needs to be finished; there is a demonstrated market fit; in terms of the team, the senior team should be mostly in place; and, there is some revenue as well.
Series B is all about going beyond. At this point, your company has had some success and has demonstrated that it understands its market and user base. The main focus will be, then, to scale your business and your user base.
The funding from this series is mostly used to improve and expand your team through sales and marketing and to grow your business through exporting and expanding to other countries. Now that you’ve achieved the most pressing goals of being off the ground and providing a competitive product or service, it’s time to expand to other markets. Private equity investors, along with VCs, will be the other players during this round.
The theme of Series C might as well be ‘to infinity and beyond’.Now you know that your startup has reached its goal and past that, it is still a successful business that people can rely on and are interested in. Why not beyond? Now is the time to materialized your dream of world domination. This round is all about more, more, more: more services, more products, more market share, more acquisitions.
VCs, and often founders themselves, utilize this round as part of an exit strategy. It is also the last frontier before reaching Initial Public Offering status.
You can repeat rounds as necessary, there are set limits. According to CrunchBase, Facebook went through a Series C four times between 2007 and 2008. However, the company needs to have advancements of some sorts and use the repetitions to fix the kinks.
Regardless of the stage your startup is in, it’s essential to be clear on your goals as a founder and the goals and motivations of the investors. The best way to move forward is to make sure there’s trust between you and the investor and that your company is getting what it needs to keep growing.