While there are a small fraction of companies, particularly technology companies, fortunate enough to experience fully internally-funded growth, most successful businesses have relied on one or more rounds of external funding to get where they are today.
So, how can you follow that same path?
If your startup is growing rapidly or you have a brilliant idea and want to take it to the next level with external capital, here is what you need to know about Seed, Series A, B, and C funding, how they work, and how to secure financing at every level.
What is Seed Funding?
Once you’ve latched onto an idea worth pursuing, the first stage of funding you’ll go through is pre-seed. Pre-seed funding primarily comes from the founders themselves and is used to kickstart operations and form the startup. After developing some traction around your idea, you’ll move into a round of seed funding to start creating your minimum viable product (MVP) and conduct research to confirm a good product/market fit. Although you are still pre-revenue, at this point, you can garner interest from friends and family investors and even angel investors or seed fund firms. Most startups you see on Shark Tank, for reference, are in their seed stage.
Pre-Seed Funding & Seed Funding
Before you get to Series A, pre-seed and seed funding can help get a great idea off the ground.
During pre-seed funding, the goal is to demonstrate a product that fulfills a market need and then use the funds raised for early-stage product development. In seed funding, however, you’ll need to prove a product-market fit to secure additional funding you can then use toward further market research and talent acquisition. Angel investors can play a key role in these early funding rounds.
Pre-Seed Funding Explained
Pre-seed funding is not always included in the funding round categorization as it comes so early on in the process. Founders are still getting their idea and operation off the ground, so the most common pre-seed funders are the owners themselves or family and friends. Once the round has concluded, you can then use the funds received to create your minimum viable product (MVP).
Seed Funding Explained
Seed funding is the first “official” equity funding stage. Your most likely investors will continue to be friends and family, but angel investors, incubators, and accelerators may also participate. Most startups you see on Shark Tank, for example, are in their seed stage. Seed financing can fund your company’s first steps, like market research, employing a founding team, finalizing business points, and perfecting your MVP.
How To Get Pre-Seed or Seed Funding
First, ask friends and family who support your business idea or contribute from your own accounts. Then, build a list of prospective investors and send out emails to set up meetings and present your pitch.
Once you reach your seed funding round, continue seeking support from friends and family. You may also begin to reach out to angel investors, use crowdfunding platforms like Kickstarter, join accelerators or incubators, or look into SBA microloans.
How Much Funding Will Seed or Pre-Seed Funding Give Me?
The amount of funding you receive for both pre-seed and seed funding rounds will vary based on the traction you’re able to prove at this stage and your business needs, but many pre-seed funding rounds garner anywhere between $10,000 – $200,000.
For seed funding, it’s another wide range from $400,000 to $2 million in potential funding.
Do Angel Investors Ask For Equity In Exchange For Funding?
Yes, angel investors typically provide financial backing for startups during pre-seed and seed funding rounds in exchange for equity.
What Is Series A Funding?
Series A funding is your startup’s main acquisition of capital. Your business is ready for Series A once you have an identified product and market and are starting to demonstrate a monetization strategy with revenue on the bottom line. You’ll likely be seeking money to hire new employees, acquire production equipment, and execute your go-to-market strategy.
Series A investors are most likely to come from well-known venture capital firms but may include angel investors as well. A few VC firms may take over, or a single investor may act as an “anchor” for the business.
How To Get Series A Funding
The best way to secure Series A funding is to join an accelerator (one-third of Series A startups do this). If you’re not within the 2% of applicants accepted into an accelerator, leverage your network to get warm introductions, a critical component to receiving Series A financing.
What Is Series B Funding?
Series B funding takes your startup to the next development stage so it can scale to meet a growing level of demand in the market.
Before Series B occurs, your company should show a good reputation with money management from Series A as well as a solid plan for how you’ll use the capital you hope to raise. Here, you’ll likely use the funds received to support your business’ growth needs – talent, business development, sales, etc.
Series B is similar to Series A in both process and players with a key anchor investor helping to draw in others. What sets it apart is a new wave of VC firms that join the investing party, a lower risk for investors than in Series A, and a greater funding need.
How To Get Series B Funding
To get Series B funding, prepare a business plan and pitch, but focus on hard numbers that reflect strong growth through your historical performance rather than projections. Try to pre-qualify a few VC firms through thoughtful networking. You may even find some VC-backed startups among your customer base that could become potential investors. When it’s time, pair storytelling within your pitch with clean financials to catch their attention and secure funds.
What Is Series C Funding?
Making it to Series C means your company is already successful in its own right. Many businesses use Series C to increase company valuation before an IPO (Initial Public Offer).
The goal of Series C is to inject capital into the heart of an already successful business and scale as efficiently as possible. At this point, your business will be looking for additional funding to expand into new markets, create new products, or acquire other businesses.
You’ll notice that as the operation becomes less risky, more investors join with confidence. The most common investors at this stage include hedge funds, private equity firms, and investment banks in addition to existing investors.
How To Get Series C Funding
To receive Series C funding, you must provide facts and figures. Potential investors need to see an illustrated tangibility of success in your business to even consider it.
Investors from previous rounds are likely to participate in Series C, along with new VCs, private equity funds, or investment banks.
How Does Funding Work For The 3 Different Stages?
Each round of funding begins with a new valuation and assessment before investors make their decisions.
Series A Financing
The goals of your Series A valuation and assessment before financing are to gauge:
- Product/market fit
- Progress using past funds
- Management team efficiency
- Ability to turn funding into profit in the future
If the investor finds the product/service to be marketable, in-demand and differentiated from direct competitors, they may decide to invest in Series A.
Series B Financing
The goals of your Series B valuation and assessment before financing are to gauge:
- Revenue forecasts
- Company performance compared to industry competitors
If investors are happy with the results of this round’s valuation, they’ll feel confident exchanging capital for equity.
Series C Financing
The goals of your Series C valuation and assessment before financing are to gauge:
- Traction in the market
- History of success
- Business promise and risk
If investors feel good about what you’re bringing to the table and your plans for the future, they’ll provide funding often used to enter new markets, acquire additional companies, or further R&D.
How Do Early Stage Startups Receive Funding?
Funding Round Categorization
The term “startup” is used as a one-size-fits-all bucket for any early-stage business, but startups can look vastly different and still fall into this category. To create distinctions between the stages and better understand a business’ progress, we use funding round categorization from pre-seed and seed to Series A, B, and C.
Early-stage startups typically fall in the pre-seed or seed stage, where they’ll receive most of their financing from angel investors.
Angel Investors Vs Venture Capitalists
Both angel investors and venture capitalists seek out innovative startups with a tendency toward tech and science industries. However, there are some important differences between the two:
- Angel investors work alone, while VCs represent a group
- Angels don’t usually invest as much as VCs
- Angel investors typically fund early-stage startups at a higher risk for more reward, while VCs focus on both early-stage and developed businesses
Series Funding Projected Growth & Valuation
At each stage of funding, your business valuation will grow as will your projected funding amounts. Below are the 2020 averages for both valuations and funding round sizes:
- Series A: $23 million average valuation, $15.6 million average funding
- Series B: $59 million average valuation, $33 million average funding
- Series C: $118 million average valuation, $59 million average funding
What Type Of Funding Should Entrepreneurs Look For
Early-stage entrepreneurs will find their best funding bets in angel investors or venture capital firms. While the type of funding your business sources is a personal choice based on business goals and current progress, there are several advantages to working with angel investors during early-stage funding.
Angel investors will take bigger risks, as it’s more than just an investment – to us, it’s an opportunity. We often bring vast business acumen and experience to the table, which is invaluable in the early developmental stages.
Angels tend to have fewer requirements for funding, and since we’re pulling from our personal funds, it allows us to use more flexible business agreements.
As an angel investor myself, I work closely with early-stage startups as they move through the rounds of funding. Not being prepared for each round can hold a startup back. Do your research, learn who your investors are at each stage, and work with the right people to turn your great ideas into a profitable venture. If you’re a tech startup founder in the early stages of funding, learn more about me here: Steven MacDonald of MacDonald Ventures.
Series A, B, & C Funding FAQ
What’s the difference between Series A and Series B funding?
The funding amount is greater in Series B than Series A, as the company is further along and needs financing to get the product out to more people.
Can nonprofits get Series A, B, or C funding?
Nonprofits cannot receive typical Series A, B, or C funding, as they won’t be getting a stock or share in return. Instead, nonprofits benefit from donations from their ‘investors.’
Can a web series receive funding?
While angel investors do not typically fund this, a web series may receive funding from alternative sources.
How much can I receive in Series A, B, or C funding?
While there’s no set limit, in 2020 the average startup funding amount was $15.6 million for Series A, $33 million for Series B, and $59 million for Series C.