Understanding Capital Raising Financing

Pre-Seed Funding 

Pre-seed funding for a new company comes at the earliest stage in the process. This stage typically refers to the period in which a company’s founders are first getting their operations off the ground. The most common “pre-seed” funders are the founders themselves, as well as close friends, supporters and family. Typically, investors at this stage are not investing in exchange for equity in the company, since, in most cases, the investors in a pre-seed funding situation are the company founders themselves.

Seed Funding

Seed funding represents the first official equity funding money that a business venture or enterprise raises. This early financial support is ideally the “seed” that will help to grow the business. If given enough revenue and a successful business strategy, as well as the perseverance and dedication of investors, the company will hopefully eventually grow into a “tree.” 

Seed funding helps a company to finance its first steps, including things like market research and product development. With seed funding, a company has assistance in identifying its final products and target demographic. Seed funding is typically used to employ a founding team to complete these tasks.

There are many potential investors in a seed funding situation: founders, friends, family, incubators, venture capital companies and more – all of whom tend to appreciate riskier ventures and expect an equity stake in the company in exchange for their investment. While seed funding rounds vary significantly in terms of the amount of capital they generate for a new company, it’s not uncommon for these rounds to produce anywhere from $10,000 up to $2 million for the startup in question. 

Series A Funding

Once a business has developed a track record (minimally viable product (MVP), proof of concept (POC), or some other key performance indicator), that company may opt for Series A funding to further optimize its user base and product offerings. In this round, it’s important to have a plan for developing a business model that will generate long-term profit. 

In Series A funding, investors are not just looking for great ideas. Rather, they are looking for companies with great ideas as well as a strong strategy for turning that idea into a successful, money-making business. The investors involved in the Series A round come from more traditional venture capital firms, such as Sequoia Capital, Benchmark Capital, Greylock and Accel Partners. By this stage, it’s also common for investors to take part in a somewhat more political process, with a few notable venture capital firms leading the pack. In fact, a single investor may serve as an “anchor.” However, once a company has secured a first investor, it may find that it’s easier to attract additional investors as well.

Typically, Series A rounds raise approximately $2 million to $15 million. 

Series B Funding

Series B rounds are all about taking businesses to the next level, past the development stage. Companies that have gone through seed and Series A funding rounds have already developed substantial user bases and have proven to investors that they are prepared for success on a larger scale. Series B funding is used to grow the company and expand market reach so that it can meet these levels of demand. Building a winning product and growing a team requires quality talent acquisition as well as bulking up on business development, sales, advertising, tech, and operational support.

Series B appears similar to Series A in terms of the processes and key players. Series B is often led by many of the same characters as the earlier round, including a key anchor investor that helps to draw in other investors. The difference with Series B is the addition of a new wave of other venture capital firms that specialize in later-stage investing. 

The average estimated capital raised in a Series B round is $33 million. 

Series C Funding

Businesses that make it to Series C funding sessions are already quite successful. Companies engaging in Series C funding should have established, strong customer bases, revenue streams, and proven histories of growth. 

In Series C rounds, investors inject capital into the meat of the business, focusing on scaling the company as quickly and as successfully as possible. These companies look for additional funding to help them develop new products, expand into new markets, or even to acquire other companies.

As the operation gets less risky, more investors come to play. In Series C, groups such as hedge funds, investment banks, private equity firms, and large secondary market groups accompany the type of investors found in previous rounds. The reason for this is that the company has already proven itself to have a successful business model; these new investors come to the table expecting to invest significant sums of money into companies that are already thriving as a means of helping to secure their position as business leaders.

Most commonly, a company will end its external equity funding with Series C. However, some companies can go on to Series D and even Series E rounds of funding as well. For the most part, though, companies gaining up to hundreds of millions of dollars in funding through Series C rounds are prepared to continue to develop on a global scale. Many of these companies utilize Series C funding to help boost their valuation in anticipation of an IPO. These valuations are also founded increasingly on hard data rather than on expectations for future success.