Rounds of Funding

In the article about Understanding Venture Capital, we touched a bit on funding. Now we need to dive into the rounds of funding and highlight the key features of each round. As an entrepreneur, it’s important to understand that as your business progresses it will go through some (if not all) these rounds of funding. Each and every round is peculiar and the requirements different. Typically, when you are in the process of securing funding, the Venture Capital firm will express its interest in your startup in the form of a term sheet. Signing the term sheet is an indication that you are in agreement and often kick-starts the funding journey. Now, let’s take a look at the rounds of funding shall we?

Pre–seed

On the onset company founders may gather up funds from their savings, friends or family in order to pursue their vision. This initial injection of funds into their business is known as pre-seed and usually does not seek a return on investment. Although this stage is not generally included among rounds of funding it is worth the mention.

Seed

The seed round is the officially recognized initial stage of funding. In this round, a startup raises funds to finance its product development and marketing efforts. Seed round funding will also help in a startup’s talent acquisition efforts and form a team that will develop the product and conduct market research. For example, a company that wants to go into Video on Demand (VOD) streaming space will require developers to build the platform from the ground up. It will also require marketing geniuses to get the product known and generate hype among potential future customers. This skilled workforce usually doesn’t come cheap hence the need for seed funding. Incubators, friends, family and the company founder are potential investors for this round.

Series A

So let’s say your VOD streaming platform is now up and running perfectly. You have just hit close to 100 000 users and counting. Your revenues are pouring in consistently and you key performance indicators are all optimal across the board. The hype in the market about your product is just positive. It may be time to scale up and expand into other markets, probably add a music streaming service onto the platform. This is where a series A round of funding is required when the company has established its roots by getting its operations off the ground and now wishes to expand. The goal here is to now formulate a business model with long-term profit in mind.

Series B

Series B is somewhat similar to Series A in terms of actors and processes with the key differentiating factor being that the key investor from the Series A round helps pull in other late-stage investors to join in the fun. These late stage investors sometimes come in the form of Hedge Funds and Insurance companies. The goal of series B financing is to take the startup past the development stage and position it for success on a larger scale. This huge expansion racks up equally big expenses in the form of, for example: business development, advertisement and additional employees.

Series C

This round of funding is all about further growth and highly successful businesses make it up to this stage. Series C funding is usually sought for when a company seeks to acquire another company for quick growth and business synergy purposes. Continuing with the VOD example, you may wish to acquire a popular 5 star rated film making company to produce content for your VOD streaming platform and achieve some sort of backward integration. Now this film making company is already successful and may be costly to buy. That’s a scenario where you may need to seek series C financing to help with the acquisition. Series C may also be used to help companies develop new products.