The Understandable Guide to Startup Funding Stages

Startup Stages

Building a startup is hard. As a startup founder, you are focused on building your product, hiring great talent, and attracting capital to your business. There are a few ways to finance your startup. Most startups use personal or family and friend capital, customer revenue, debt financing, or venture capital to grow their business.

When first launching your startup, finding the initial capital can almost feel impossible. If not for personal capital or friends/family capital, most founders look to venture capital. If a startup decides to raise venture capital, they will likely raise multiple rounds and go through different stages.

For example, when you are raising the first capital for your business this is called seed stage. As you grow and raise more capital, the round names progress as well. After the seed stage comes Series A, Series B, Series C, and so on. Below we define and take a deeper dive into the different startup funding stages.

There are multiple stages of startup funding: Seed, Series A, Series B, Series C, and so forth. Startups should be conscientious about the funding rounds that they will go through, which are generally based on the current maturity and development of the company. Here’s an overview of the major startup stages.

Seed funding is a startup’s earliest funding stage. Often, seed funding comes from angel investors, friends and family members, and the original company founders. An early-stage startup may also look for funding through bank loans, but angel investments are usually preferred. Seed funding is used to start the company itself, and consequently, it’s a fairly high risk: the company has not yet proven itself within the market. There are many angel investors that specifically focus on seed funding opportunities because it allows them to purchase a part of the company’s equity when the company is at its lowest valuation.

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The next stage of the startup funding process is Series A funding. This is when the company (usually still pre-revenue) opens itself up to further investments. Series A funding is generally much more significant than the funding procured through angel investors, with funds of more than $10 million usually being procured. Series A funding is often acquired to help a startup launch. The business will publicize itself as being open to Series A investors and will need to provide an appropriate valuation.

After Series A funding comes Series B funding. Series B funding occurs after the company has already been developed through Series A funding but now needs to expand further. A company attempting to acquire Series B funding will have already proven itself at market. It will have a high amount of active users and user activity, but may need to still establish itself to truly begin growing revenue.

Finally, there’s Series C funding. Series C funding is for established businesses that are interested in scaling, such as businesses that want to expand into new markets. Series C funding is sought by companies that have already become successful, and are trying to expand that success. Series C funding may also be used by successful companies that are experiencing short-term challenges that need to be addressed.

Multiple rounds of Series A, Series B, and Series C funding may be procured. They are named A, B, and C because of the stage of development the company is in when procuring the funding, rather than because they are procured one after another. A startup can expect to go through all these stages of funding if it is successful, from initial seed funding to Series C funding. Most companies are going to be continuously gaining additional funding for the purposes of growth.

Each stage of the startup funding process operates very similarly, despite the different stages the business might be in. During the startup funding process, the company has to be able to establish it’s valuation, and will need to have clear plans for how it is planning to use the money it procures. Each round of funding will also, by necessity, dilute the company’s equity.

Pre-Seed Funding

Over the last few years, a new funding stage has emerged, pre-seed funding. Learn more about pre-seed funding and what it means for your fundraising efforts below:

What is pre-seed funding?

A pre-seed round is a round of venture capital that is generally the first round of institutional capital that a startup raises. A pre-seed round generally allows a founding team to find product-market fit, hire early employees, and test go-t0-market models.

Related Reading: What is Pre-Seed?

What is the average pre-seed funding amount?

The size of pre-seed rounds varies quite a bit from company to company. There is no cut and dry amount. Research shows that round sizes can range anywhere from $100,000 to $5M at the pre-seed round. At the end of the day, you will want to weigh your business needs when setting valuations and determining how much to raise.

How to acquire pre-seed funding?

Raising a pre-seed round mirrors a traditional B2B sales process. You will be talking and adding investors to the top of your funnel, pitching and negotiating in the middle of the funnel, and hopefully closing them at the bottom of the funnel. Learn more about building a fundraising process in our guide, “All-Encompassing Startup Fundraising Guide.”

We sat down with Jonathan Gandolf, CEO of The Juice, every week during his pre-seed raise to breakdown what he was learning along the way. We boiled down the conversations into 8 episodes. Give it a listen below:

How long does pre-seed funding last?

As a general rule of thumb, funding should last somewhere between 12 and 18 months. It should be enough capital to allow you to comfortably hit your goals and forecast you laid out during your pitching and fundraising process.

Who invests in pre-seed rounds?

One of the plus side of a pre-seed round is that it opens up more types of investors as the check sizes are generally smaller:

Active pre-seed stage investors

As we mentioned, there are many dedicated pre-seed funds that are popping up in the space. Check out a few of our favorites below:

Find more pre-seed investors in our investor database, Visible Connect, here.

Related Resource: What is Pre-Revenue Funding?

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Seed Funding

As we mentioned earlier, “Seed funding is a startup’s earliest funding stage. Often, seed funding comes from angel investors, friends and family members, and the original company founders.” More investors have become keen on being an early investor into a startup so they have access to invest again at later stages.

Raising seed stage funding is a major accomplishment for a startup. Seed stage funding is the initial surge of capital into the business. At this point, a startup is largely an idea and will have little to no revenue. This stage is generally when a product and go-to-market strategy are being built and developed.

Over the past couple of years seed stage funding has exploded in round size. What used to be regarded as a few small checks from family and friends has turned into a multimillion dollar round. Check it out:

There are generally 3 ways a founder can go after raising a seed round. The first, and most common, is finding that the time is not right for the startup is not scalable and the startup goes defunct. The second, is finding that the seed stage capital was all that the company needed to get going and can fund the growth of the business via customer revenue and debt financing. The last option and most traditional route is raising future startup funding rounds; Series A, Series B, Series C, etc. More on this below!

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Series A Funding

After raising a Seed Round it’s time for a company to advance to a later round of venture capital financing, that means Series A funding. For many startups, the idea of Series A funding is intimidating — yet it can also be a make or break time for a business.

What is series A funding?

When a company is first founded, stock options are generally sold to the company’s founders, those close to them, and angel investors. After this, a preferred stock can be sold to investors in the form of a Series A. Series A allows investors to get in early with a business that they truly believe in. It’s a mutually beneficial relationship for both the company and the future stock holders.

Series A funding can be difficult because it also requires a Series A valuation. At the time of Series A funding, the company has to be valued and priced. Thought must go into previous investments, as prior investors will have also purchased the business at a specific valuation. If an angel investor purchased into the company at a valuation of $100,000 just months ago, then new investors may balk at purchasing at a $10,000,000 valuation today.

What is the average series A funding amount?

As of 2019, the average Series A funding amount is $13 million. The average Series A startup valuation in 2019 is $22 million. A Series A valuation calculator can be used to get close to the number that you should value your company at, though you will also need to thoroughly justify your valuation.

How to acquire series A funding?

A company’s valuation will be impacted by a number of factors, including the company’s management, size, track record, risk, and potential for growth. Analysts can be called in for a professional valuation of the business. During a Series A funding round, a business usually will not yet have a proven track record, and may have a higher level of risk.

During a Series A round, investors will usually be able to purchase from 10% to 30% of the business. Series A investments are generally used to grow the business, often in preparation for entering into the market. The company itself will be able to decide how much it wants to sell during its Series A round, and may want to retain as much of the company control as possible.

Let’s start out with a hard truth: sometimes revenue doesn’t matter much in a successful Series A raise. If you’re a seasoned SaaS entrepreneur with a strong team, raising your next round will be much easier than for a first-time founder. Many VCs will place the greatest emphasis on past success for the best indicator of future results—whether or not a company’sunit economics are solidor if they’ve reached the proper revenue benchmarks. Jason Lemkin claims he’d comfortably invest in a pre-launch SaaS company with $0 in ARR if the team is strong and experienced and the market and opportunity are huge. “This makes sense as in many cases, SaaS is an execution play,”Lemkin wrote on Quora.“Put the best team into a strong, upcoming (or disruptable, large market), and that’s a good bet to make.”

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But if you haven’t birthed any unicorns or shepherded any startups to 10x exits already, your benchmarks may be a little more concrete. In the same response, Lemkin wrote that he looks for unproven, bootstrapped startups to hit about $2 million in ARR. In an interview with SaaStr,Tomasz Tunguz estimated a lower mark. Tunguz said most of the founders he speaks with are looking to hit somewhere between $75,000 to $125,000 (or $900,000 to $1.5 million in ARR) in MRR before making their Series A pitch. Despite the wide range, it seems pretty tough for any new founder to conduct a strong Series A round without revenue nearing $1 million ARR in today’s fundraising environment. Without that, you’re going to have to lean more heavily on pitching your market opportunity or product superiority.

Beyond your revenue benchmarks , investors are also going to be eager to see how quickly your startup is growing. Here’s the formula to calculate your monthly growth rate:

Month-over-month growth = (This month – Last month) / (Last month)

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If your startup measures year-over-year or week-over-week growth instead, simply substitute the annually or weekly number into the monthly slot and the formula works the same.

Like MRR, your target monthly growth rate for earning attention from Series A VCs will vary. However, Tunguz puts 15-20% monthly growth as a solid range to hit in order to attract investors.Be careful to chart out your monthly growth over an extended period to ensure that you aren’t experiencinginconsistent results or your perceived long-term growth isn’t hiding a trendtoward declining numbers. Potential investors are going to interrogate those numbers and examine trends. You don’t want to be the last person in the room to vet your own results.

If you square away around $1 million in revenue and experience a consistent 15%+ monthly growth rate, you could reasonably raise at a $10-20 million valuation. And since most VCs will want to take about 20 percent equity in your Series A round, you can expect to raise $4 million at a $16 million pre-money valuation or $5 million at a $20 million valuation.

If you’re conducting responsible, consistentfinancial planning, you can start to forecast when your startup will be ready for its Series A. Talk to your seed investors early to get their feedback on your plans and brainstorm strategies to maintain or increase your revenue growth. Also, your investors likely see a variety of deals on a regular basis, while you’ll maybe pitch a few times a year. Lean on their expertise to identify other intangible factors in the fundraising market and prepare yourself for a successful round.

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How long does series A funding last?

Once the funding round has been completed, the company will usually have working capital for six months to 18 months. From there, the company may either be able to move to market or may instead progress to another series of funding. Series A, B, and C funding rounds are all based on stages that the company goes through during its development.

It is important to remember that when raising your Series A you are setting goals and objectives for what that capital will do to your business. You need to raise enough capital to help you achieve these goals so you can go on to raise a Series B or future round of capital.

Recommended Reading: How to Pitch a Series A Round (With Template)

Series B Funding

Once a business has been launched and established, it may need to acquire Series B funding. A business will only acquire Series B funding after it has started its operations and proven its business model. Series B funding is generally less risky than Series A funding, and consequently there are usually more interested investors.

What is series B funding?

As with Series A funding, the company begins with a valuation. From there, it publicizes the fact that it’s looking for Series B funding. The company will be selling its equity at the valuation that is settled upon, and investors are free to make offers regarding this valuation. A startup that gets to Series B funding is already more successful than many startups, which will not go beyond their initial seed capital.

What is the average series B funding amount?

On average, Series B startups will usually get $7 to $10 million in Series B funding. The bulk of the heavy lifting will already have been done by seed capital and Series A funding. Series B funding will simply be used to grow the business further and improve upon it. Most Series B startups are going to be valued between $30 million to $60 million, because (again) they are proven companies.

How to acquire series B funding?

Sometimes Series B funding will come from the same investors who initially offered Series A funding. Other times, Series B funding may come from additional investors, or from firms that specialize in investing. Either way, investors are usually going to be paying more for less equity than investors did in prior funding rounds, because the company’s valuation will have scaled. A Series B funding valuation will need to consider the company’s current performance and its future potential for growth.

Analysts can be used to price a company looking for Series B funding. However, it should also be noted that the company itself has more negotiating power as a Series B company, as it has proven itself to be successful.

How long does series B funding last?

Once Series B funding has been procured, the business will need to use this money to further stabilize, improve its operations, and grow. At this point, the startup should be in a good position. If the startup needs further money after it develops, to grow and expand, it may need to embark upon a Series C funding round.

Related Reading: How to Pitch a Perfect Series B Round

Series C Funding

Series C funding is meant for companies that have already proven themselves as a business model but need more capital for expansion. Like Series B funding, Series C investors will often be entrepreneurs and individuals who have already invested in the company in the past. A startup may connect with their angel investors and Series A and Series B investors first when trying to procure Series C funding.

What is series C funding?

If a business has made it to Series C funding they are already quite successful. Whereas earlier stage rounds are used to help a startup find traction and grow, by the time a startup raises their Series C they are already established and growing.

Since the business is already established and just needs its funds to grow or expand, it is less likely to be a risk. At this point, the startup is no longer really a “startup,” but rather an established business with a proven business model, which needs to either expand its product offerings, expand into new markets, or expand its marketing output.

By raising a Series C a business will be able to make strategic investments. This could mean investing in market expansion, new products, or even acquiring other companies.

What is the average series C funding amount?

A Series C funding amount is generally between $30 and $100M settling on an average round of $50M. At this point, a startup’s valuation is likely over $100M and they are on a national radar looking to expand internationally.

How to acquire series C funding?

When approaching a Series C, the strategy will likely change from earlier rounds. As we mentioned, the average is around $50M. This means that your investors cutting checks between $1 and $5M from earlier rounds are no longer likely to lead a round. Previous investors may be keen to invest in your Series C but startups will need to fill out the remainder of the round from other investors.

When approaching a Series C valuation, your company likely speaks for itself and will have more inbound requests from investors. These investors will likely be later stage VC funds, private equity firms, and banks.

How long does series C funding last?

Depending on the business strategy, a Series C round may be the end of the road in terms of venture capital financing. At this point, the company is likely headed in a strong direction and owns a large % of an addressable market. However, some companies go on to raise their Series D, Series E, Series F, and even Series G.

Later Startup Funding Stages

Series D Funding

A Series D funding round may occur if the company was not able to raise enough money through its Series C. This often has implications for the business. Series D funding occurs when the business was not able to meet its targets with its Series C, and consequently it can mean that the business is now at a lower valuation. Being priced at a lower valuation is usually very negative for a business.

If Series D funding is necessary, due to challenges that the company is facing, then it may be the only way for the startup to survive. However, it generally devalues the company, and may shake future investor faith.

Series E Funding

Series E funding may be necessary if Series D funding isn’t able to meet the company’s needs for capital. This is, again, a very bad sign, and very few companies are going to survive to Series E funding. Series E funding will only occur if the business still hasn’t been able to make up its own capital but the business is still struggling to remain active and private.

Series F & G Funding

Finally, very few companies are going to make it to Series F funding or Series G funding, but it is possible. Some notable financial services have found themselves getting Series F or Series G funding, because capital is so inherent to the ways that they do business. Every round of funding represents new opportunity for the business, but also presents the possibility of diluting the company’s equity and valuation.

Looking to raise? Track your fundraising or find investors with Visible Connect.

The Understandable Guide to Startup Funding Stages | Visible.vc (2024)