Startup funding rounds explained
Whether you’re gearing up for your first investor pitch or just want the startup funding rounds explained, this quick read will get you sorted.
But first … how do we know about startup funding rounds? Well, we’re not typical accountants. We’re dedicated to startups, and we help many of them understand and access their funding options.
Our experience in the venture capital industry helps us do this. So does our work as virtual CFO for startups and our first-hand knowledge of what it takes to run our own startups.
So we know the biggest trap for new players …
Is probably understanding how equity works.
Every time you go through a startup funding round, you can expect to give up 10-30% equity in your company.
This can be off putting but would you rather own 100% of something that’s worth nothing, or 60%, 40% or even 20% of something really successful? In other words – equity investing is about having a smaller piece of a bigger pie.
That said, you do need to be comfortable with it and some founders just aren’t, because it’s not always all about the money.
But if you do want to raise capital from investors, you need to understand how startup funding rounds work. And here you go.
Seed stage funding round
As the name suggests, this is the first early stage startup funding round.
By now, founders have usually bootstrapped (used their own personal funds and any earnings from the startup) to survive and have often done a friends and family round too.
This early stage startup funding is often used to cover expenses of building your product and gaining traction until your startup begins earning revenue.
In Australia, private angel investors and accelerators are common sources of seed funding.
Series A funding round
This is usually the first round of venture capital (VC) financing.
Having said that, some VCs do invest in seed stage (and if they do, it’s usually between $100,000 and $250,000) but typically, they prefer to invest around the $500,000+ mark at Series A or beyond – to justify the effort involved.
For a Series A funding round, you’re usually expected to have a product and be starting a user base.
And from the investor’s point of view, Series A funding rounds usually secure them preferred stock in a company. This means shares that receive various forms of preferential treatment, including getting paid first (liquidation preferences) before returns to common shareholders. They often have other protective measures too, such as downround provisions to protect them if the value of your startup goes down (it does happen), and approval/veto rights over future startup funding rounds.
Series B funding round
As you’ve probably guessed, Series B is the startup funding round that comes after Series A!
Aside from its alphabetical order, B stands for build, and that’s usually what this funding round is about – taking a startup past the development stage to the next level in the market.
At Series B, venture capital firms have more of a vision around what the startup can achieve and they invest to help it bulk up on business development, sales, advertising, tech, support and people to realise that vision.
In this funding round, the venture capital firm/s from Series A often reinvest (it’s actually a condition that they want the right to follow on). Plus other investors that specialise in later stage investments might also come on board.
Series C and beyond
Series C startup funding rounds and beyond are about continuing to scale, ultimately towards an exit of some kind.
These rounds fund the company so it can maximise market share, grow internationally and buy other companies, for example.
As well as the original earlier stage VCs, other later stage investors often now get involved too, now that the company and product are more established and therefore less risky.
And from the investors’ perspective, these later investments are about propelling a startup forward to an exit, such as being acquired by another company (a trade sale) or listing on the stock exchange, so they can get a return on their investment and start their investment cycle all over again, elsewhere.
I’d like more on startup funding sources
We thought you might.
Running a startup is a cash hustle so you need to understand all your funding options from loans and grants to R&D incentives, angels and venture capital firms.
But many startups don’t. In fact, running out of cash is the second biggest reason startups don’t succeed.
Which is why we’ve put together a free ebook called the Startup Founder’s Guide to Funding. It explains the startup funding stages and covers each funding source in detail.
It’s been written especially for early stage startups so if that’s you, it might be the most important 15 minutes you spend this week.
Want to really understand startup funding?
The Startup Founder’s Guide to Startup Funding
Your practical step-by-step ebook to understand how startup funding works plus how and when to get it.
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