Venture Funding Phases
Venture fundraising used to have a fairly consistent cadence. Seed, Series A, then B, C, D, etc. till you are either acquired or go public. That venture “ladder” has fallen to the wayside and a new trend has emerged, fundraising phases.
Angel, pre-seed, seed, seed extension, pre-Series A, blah, blah, blah. We keep inventing funding rounds instead of facing the truth about how the fundraising landscape has shifted. Investors no longer look at these stages and have really broken into three phases of a startup's life cycle and funding needs. Seed, Series A & Growth:
Seed is the stage defined by a startup being pre-product-market fit. This is the riskiest phase of a startup's life cycle and the future of the “seed” phase is defined by angels, operators, rolling funds, and direct investments. A lot of the times there is little to no revenue at this point and founders and investors are either trying to build something completely new for the market, or they are overhauling an existing solution to optimize for speed, price, convenience, etc.
The seed phase can typically be filled with many “small” rounds with checks coming from various individuals and more and more from small rolling funds from emerging managers, some as SAFEs and Notes, with a priced round possibly late in this phase. It is not atypical in this phase that if revenue and product-market fit takes longer than planned, the investors will provide bridge-style capital at a “flat valuation”, being that they get to buy more equity at the same price. Seed investors are your early believers and often focus on helping founders distill ideas into a product that they can take to market. We call this phase “seed” because it truly is about getting an idea to take seed and begin to sprout.
Series A Phase
Series A is the “ah-ha!” phase. This is when a startup realizes they have found product-market fit, have a functional MVP or even a v1 of their product or service and are ready for a larger institutional round to help them operationalize around it. Series A typically is the first “big fund” round many startups raise, this is where you see a $5–10M check which is meant to give the founders enough capital and runway to go hire sales, marketing, support, and success teams so they can really start to scale out in the customer segment that they have found a strong fit with.
Series A typically occurs around the $1M ARR or run rate milestone though that can vary by industry and if there are certain areas that are more competitive for funding dollars. This is really the defining moment for most startups, can you turn this from just a cool or interesting idea into a company. Series A investors tend to focus on operationalizing an idea and often help founders put systems in place so they can start to track their growth and performance as a business.
If you are able to operationalize and start scaling after your A round, everything after that is just “growth gravy”, that is these rounds are now all about pouring gravy (capital) into growth. New customer acquisition, net revenue expansion, customer retention, and any other activity that helps continue to grow MRR. The key here is for MRR/ARR to keep growing and then raising new capital just becomes a product of opportunity at a higher valuation and the letter (B, C, D, etc.) is inconsequential.
At this point, the investment is certainly de-risked for the investors here versus the “seed” phase. Though there is always the risk of a company crashing (see WeWork for reference), though growth phase investors are looking to 5–10x their money, versus seed investors who need it to 100–1000x. Once you enter this phase, any investment is about growing your revenue and teams to a big enough number that you can justify going public, or become an acquisition target.
Originally published at https://www.talkinsaasy.com.