The Five Stages Of Startup Funding

In order for your company to grow, however, unless you’re Jeff Bezos, you’re inevitably going to need to look at how you get funding. Over the past ten years or so, there has been a huge surge in the amount of Venture Capital that is available for all stages of startups.

But do you know your seed to growth from your Series A to Series C?

If not, then don’t worry. There’s a huge scope of traditional capital as well as newer alternative ways of financing your business. We’ll guide you through the different stages of startup financing so that you know where you’re at, and what you can expect along the line.

1. PRE-SEED

Average Funding Amount: <$0.25 million

Traditionally, a seed round was considered to be the first kind of money fundraising that a business founded would need to do. Thanks to the increase in startups, the competition within the marketplace has become much fiercer.

This has led to the idea of pre-seed funding rounds. This involves a company proposing the specific milestones that they need to accomplish before they are ready for a larger investment. These can involve a prototype product, to hiring necessary team members.

Pre-seed financing is often used to allow a startup to bridge the gap to the next round, and usually comes in three main ways:

• Friends & Family: These are the people who wish to support your project either because they love you, or because they love your idea. Parents, relatives, friends, and sometimes strangers on Instagram who are willing to throw some money your way to help you focus on your dream.
• Business Angels: Angels come in all guises, and in this case, they are typically those who have money of their own that they are willing to invest in a new startup. They may have experience in startups or are willing to invest in an idea at a stage when ROI isn’t guaranteed.
• Accelerators: These organizations offer mentorship and advice, capital, and often working space in exchange for between five and 10 percent of equity.

2. SEED

Average Funding Amount: $1.7 million

When a company is ready to move beyond just having its founders, and is looking at product development or even potentially generating income, it’s seen to move onto seed funding.

This kind of seed investing includes an endorsement that the company shows strong signs of growth, either in terms of a customer base or month-to-month revenue growth. The business idea shows a great Product and Market potential, and scope for traction.

Thanks to the increase in startups available, and the success of some startups, investors now extend beyond Business Angels. Venture Capital (VC) Funds become involved and increase the amounts of investment money. The largest seed round in 2015 was $10 million dollars.

In general, there is a huge range of seed sizes, depending on who is investing.

• The median Business Angel funded seed size is typically around $150,000
• The median VC-led seed size is usually much closer to $1.5 million

3. Series A

Average Funding Amount: $10.5 million

By the time a startup has made its way to Series A, it is expected that it will have significant revenue growth from new customers, as well as an increase in the Average Revenue per Account (ARPA). In fact, the focus of Series A is on ensuring that revenue growth for the startup is set to continue.

At this point, growth for the startup has been on a single channel, without complex sales or marketing processes or new channels. In Series A, marketing and sales become a major focal point in order for the startup to understand their customer base, develop new sales and marketing processes, and identify growth opportunities across different channels.

At this point, Business Angels have made way for Super Angels. However, it’s typically the VC organizations which are fronting the money for the startup to expand. This is also why Series A rounds are dramatically increasing in size, as they are no longer reliant on a single wealthy financier.

4. Series B

Average Funding Amount: $24.9 million

Where pre-seed to Series A has been about mastering the art of the startup, by the time Series B comes around the startup is expected to have a product or service that can work when it is scaled up. The startup should know what it does well, and how to do it, as well as where they want to take this.

Depending on the business or service that the startup performs, this is where a startup is expected to be able to reach out to different market segments. A great time for hiring, the company will be looking at hiring business development roles, marketing, and customer success posts, and strategic account hires.

In some cases, the revenue streams may diversify, or a startup may even consider buying out other small business which allows them to maintain their competitive advantage.

5. Series C and Beyond

Average Funding Amount: $50 million

By the time a startup gets to Series C funding, a startup is now looking at a dramatic increase in expansion. This can include moving into international expansion or taking over other businesses in order to broaden their offerings and reduce competition.

When it comes to startups, very few companies make it to Series C, although theoretically funding rounds could continue through Series D, E, F and beyond. However, typically at this stage the startup has proven its financial viability enough to encourage financial institutions to be involved in investment.

This increases the amount of money a startup experiences for investment by astronomical amounts. A “cinematic reality” startup called Magic Leap raised $793.5 million in 2016 for their Series C funding, making it arguably the biggest round in VC history.

From this stage for many startups, the outcome tends to be an IPO, or for them to be acquired by a much bigger company for a much bigger amount of money.