Do You Know Your Venture Capital A, B, Cs?
Most startups are on a mission to change the world in some way. Teams put in their blood, sweat, and tears to deliver their solution to the world. Along the way, startups have the option to apply for venture capital funding. This type of financing allows venture capital firms to invest in startups in exchange for equity.
Startup teams have the option to apply and if selected, present their company to a venture capital firm. If the VC firm likes what they see, the company negotiates how much equity they want to give the VC firm in exchange for capital. In these cases, the investment firm has the upper-hand.
Companies that are “bootstrapping,” or running their business off of the generosity of friends and family, are the ones that typically seek out funding from VC firms.
After a company goes through a seed funding process and has established a user base or revenue, they’re eligible for Series A funding.
Series A: Companies trying to obtain financing in a Series A are typically valued up to $15 million. It’s important that when startups are pitching to investors in this round that they have a solid explanation for how they are going to monetize their business. Simply having users isn’t going to cut it.
Accel, Benchmark, Greylock, and Sequoia are all common venture capital firms that fund Series A rounds.
Series B: Most companies looking for Series B funding are past a “development stage” and looking to further build out their platform. In other words, companies looking to raise this kind of funding are well-established.
Funding in this stage is primarily used for sales, advertising, tech, support, and additional employees. A majority of people consider Series B the growth round.
Most of the venture capital firms in this stage are the ones from the Series A funding rounds.
Series C: Companies looking for Series C funding are hoping to expand into new markets, create new products, or acquire other companies. For this reason, companies looking for a Series C must have quite a bit of success.
Series D: Anything after Series C is simply an “extra” round of financing before the company IPOs. Of course, not all companies IPO, however, venture capital firms will likely push for it if the company is needing cash after a Series C or D. There comes a time when VC firms want to start increasing their Return On Investment (ROI) and that’s harder to do when they’re frequently injecting capital into the business.
Before any of this comes seed funding or possibly even pre-seed funding. As you advance, opening your company up to the possibility of raising Series rounds offers advantages and disadvantages. One of the biggest disadvantages is having to give up an equity stake in your company. However, there are some companies that provide funding without taking an equity stake. 500 Startups is a good example of this.
What’s your opinion on giving up equity in your company, even to an investor?
