It is always great when one can fund their startup business with their own money. And in the initial stages, this is preferred by many startups as it involves lower risk to the business, even despite the cost borne by the founder or founders. But as startups start to grow in size and expand their business, venture capital funding becomes a must. And this is where startups start looking for investors for series funding round.
Series funding for startups refers to the different stages of funding, which help a startup stand on its feet, develop business, widen the market and upscale to reach the point of IPO offerings or acquisition by bigger companies. Series funding investments, hence, play a key role in a startup’s success.
The stages of funding are classified according to their utilisation, starting with pre-seed funding. This is the money raised to do initial market research and make plans to realise the idea. Seed funding is raised to launch the business, set up the infrastructure, hire employees and start the production.
Next in line are Series A and Series B funding, that are meant for the growth stage of the business, and Series C funding is for rapid upscaling at a later stage. Furthermore, if extra money is needed, startups also raise sub-funds like Pre-Series A or extended Series A.
Related Article: Seed Funding For Startups: Stages, Investors, Timing And Sources
Before an entrepreneur decides to approach venture capital companies for each of these funding rounds, it’s important to know how series funding works through different stages. But prior to that, one needs to know the differences between the steps of series funding. Let us now explain the series funding process step by step.
Types of Series Funding For Startups
- Series A Funding:
The venture capital investment made in initial years to help the startup develop its business is termed as Series A. After the pre-seeding investment to develop the business idea, seeding investment is made. The next step is laying the foundation of the business, setting infrastructure, hiring employees and market research, for which Series A funding is the capital invested. This fund is meant for the enterprises that are already earning revenue but are still in the pre-profit phase. The venture capital companies invest at this stage to help the startup develop its business and products, and grow the product to meet the increasing demand from markets so that it moves up the business curve. The aim of Series A investment, therefore, is to optimise business for the startup and help it reach the status of unicorns.
- Series B Funding:
The next stage venture capital investment is called Series B, which intends to support the startup in building its market base. Past the Series A funding, the enterprise is at a point where it has satisfied its existing customer base and has assured investors of its ability to increase their profits. Thus, Series B funding is meant to take the startup to a new level, expanding to other markets. This stage of funding, therefore, helps the company grow and earn higher profit.
- Series C Funding:
This type of funding, provided to help the startup upscale, maximise profit and reach the level of IPO offerings or acquisitions, is termed as Series C. At this stage, the startup is already successful, expanding to markets and growing the product base. This is the time when venture capital companies look to inject money further, to ensure getting good returns from the investment made. Hence, Series C funding aims to upscale the startup at a quick rate to ensure fast-paced and maximised returns.
- Pre-Series A or Extended Series A:
There are certain sudden requirements that are raised through sub-funds like Pre-Series A or Extended Series A. These are raised between Series A and seed funding, and Series A and Series B funding. Sometimes startups are past the seed funding stage but not in a position to convince investors or VC firms for Series A funding. Here, the follow-up money required to push the revenue higher is raised through mid-round funding called Pre-Series A.Extended Series A funding refers to the case when Series A funding has already been raised and the company has started earning a profit. Here, the startup might require additional money to reach the stage of raising funds for expanding to other markets. This mid-round is termed as extended Series A funding of a startup.
- Series A Funding:
How Startups Can Raise Series Funding
With the stages of series funding and their work processes identified, the entrepreneur now needs to know the ways to get series funding and invest it accordingly.
Raising Series A Funding:
Venture capital firms seek entrepreneurs with great ideas and a powerful strategy to transform the startup into a profitable business to invest for Series A funding. So if an entrepreneur has a unique idea with the potential to succeed in the market, has started earning revenue with a clear vision of how to take it towards profit, he can approach VC firms. But to convince the investors, the startup needs to prove on paper that it is a working business with huge possibilities of making profits.
At this stage, where investing in startup remains a risky affair, venture capital investors tend to co-invest. So, an entrepreneur needs to look for an investor with a high reputation to act as the anchor investor who will attract other investors to rely on the startup and invest together. The collective fund, thus raised, helps the entrepreneur to start making profits. As per the industry estimates, the average Series A funding in 2019 reached around $13 million with the startup’s pre-money valuation being $22 million.
Raising Series B Funding
This requires the entrepreneur to present definite profit figures to convince investors. Since at this stage the funding aims to widen the market and increase profit margins, here as well the investors prefer co-investing. But in this case, as the startup has already entered the profit-making phase, investors are likely to foresee returns from investment. Thus, investors who are known for making later-stage investments are also interested in Series B funding and join the funding huddle for an already-successful startup. Estimates say that the average amount raised during Series B funding in 2019 was $32 million, with the startup being valued at $58 million.
Raising Series C Funding
the startup is already on a higher profit margin and eyeing IPO offerings, merger with bigger companies or buying smaller startups with the potential to expand further. Hence, finding Series C investors is not at all a difficult task. With signs of big returns, investment banks, bigger groups, private equity firms and hedge funds also join as investors, expecting to cash out big amounts from later affairs. Currently, the funding average at this stage has reached $55 million with the startup valuation at an average of $115 million.
How To Reach Investors For Series Funding
Reaching investors for Series A, B, C funding requires the business to keep rolling and increase in valuation until they reach the level of convincing investors at the respective stages. For example, for Series A funding, a startup must have sold the first class of its preferred stock.
Next, Series B funding needs the business to be a unicorn that is ready to shift from its current customer base and expand to other markets. For Series C, the startup must have grown and it is now time to upscale to the point of IPO offerings, merger or acquisition. But at each stage, apart from the specific company valuation levels, the startup also needs the entrepreneur to be at his convincing best. The entrepreneur should have good communication skills, along with a good business pitch, clearly stating the way forward for the business, and illustrate the idea through data, document and balance sheets to support the current status and claims.
Pros And Cons Of Raising Equity Funding
With opportunities, come challenges too. The benefit of raising equity funding in series funding rounds that the entrepreneur doesn’t need to pay back the money. So if there is a loss, there won’t be extra pressure on the business to repay debt funding or loan. But the investors too would like to earn from the returns and secure themselves. This creates a disadvantage for the entrepreneur as he gets the money against company equity. Therefore to secure returns from the investment, the investors or the VC firms keep interfering in the business decisions and strategies of the startup, thereby snatching autonomy from the entrepreneur over his own business.
But nonetheless, series funding acts as a stairway to success in a startup’s journey. But to ensure the desired results, the entrepreneur plays a key role in implementing the idea and carrying on with zeal and effort to utilise the funds effectively and efficiently.