You aren’t the only person out there that wants your business to succeed. That’s right there is an eager investor ready to fill your penny jar so you can experience exponential growth. Tap into this post to get the scoop on different kinds of investors and Series A, B, and C funding rounds.
In this article:
- Funding rounds meaning
- Seed investors, angel investors, venture capitalists, and unicorn investors
- Accelerators vs incubators
- Pre-seed, seed, and A B C funding
- Difference between Series B and C
- 4 ways to prepare for your series round
Funding Rounds Meaning
Funding rounds are a marathon to gain business investment. They are a series of stages where you apply for funding from different types of investors. Each successive investment gets you farther along in your business journey, spreading through your company supporting operational growth, research and development(R&D), and your corporation’s initial public offering (IPO).
Who has the money?
When we talk about funding rounds we are talking about Other People’s Money (OPM). Who are those other people? The investors you reach out to will depend on what stage of growth you are in. Savvy professionals are looking to jump on your bandwagon at each milestone, to help you navigate the cutthroat business world. Here are profiles of potential investors:
Bootstrapping vs Funding Rounds
A new business will usually start by bootstrapping, pulling themselves by the bootstraps. Bootstrapping doesn’t rely on outside investors or bank loans; this method is largely thanks to personal savings or help from close contacts. In this stage, a startup is running operations without acquiring debt or offering large portions of equity. Bootstrapping is different from funding rounds for its small scale and intimacy with “investors” who are keeping the lights on or paying rent.
Seed investors are the initial people you turn to when forming your startup. These could be friends, family, or acquaintances, but with more formality. Seed investors are giving you the first injection of cash to drive operations, and unlike familial helpers, there is an equitable exchange. Seed investors want to bring the concept to launch so they usually have active participation in the company.
There is a hierarchy in the different types of investors, and angel investors sit lower on the totem pole. At no discredit to them, because they are a lifeline in the early stages of business, but they don’t have credentials like venture capitalist firms and unicorn investors. They do have a vested interest in your success and the return on interest (ROI) of their funding—it is their method of investment in other startups. Angel investors will be your miracle consultants, pumping your company with insights that prepare you for the big leagues.
Your typical VC has been through the storm. They likely are representatives at a venture capitalist firm, or they are savvy business owners with a high net worth. Most importantly venture capitalists and VC firms are accredited by the Securities Exchange Commission (SEC).
Why are venture capitalists accredited? If a person wants to hand out money, shouldn’t they be able to do it freely?
Having credentials is required to be a venture capitalist to prevent insider trading. This isn’t your typical casino, they are gambling in the private equity of corporations. Since corporations are run by a board of directors, likely scenarios play out where a VC is a board member and large inflows of investment funding must maintain compliance.
Every company wants to be a unicorn, but most are just beautiful horses. Unicorn investing is when a company stands out as one-of-a-kind. Just like other start-ups they need investing and guidance. Unicorn investing goes through venture rounds, but on a whole other level.
Unicorn Investors are looking at tall financial projections, with nothing to compare to in the market. Most of it is based on speculation and trust in C-Suite executives because you are buying the people as much as the business concept.
What Are Accelerators?
This is a network of resources for startups to, as the name suggests, push the gas pedal on growth. Accelerators have classes that prepare founders for investment from angel investors who run the program. These programs can be likened to a school for startup CEOs, they are difficult to get into, but they are well worth it. The presentation for funding in accelerator programs is similar to securing series funding rounds, so even if the business isn’t chosen they have the know-how to seek investment elsewhere.
Accelerator programs are helpful at the early stages of your business’s journey. They provide vital business education to founders, so they have the essential skills needed to compete in the market. There is a network of high net worth mentors, and depending on the accelerator program the mentors are pooled from fortune 500 companies. Here are the best accelerator programs:
Accelerators vs Incubators
Accelerators often get confused with incubator programs because they both help to develop startups. The major differences between accelerators and incubators are where you are in your business journey and how you compensate the program. For accelerator programs, your business has launched and you either have a minimal viable product (MVP) for sale or product-market fit. Generally, participants in accelerator programs have earned sales and want to speed up the first couple of years of business. If you are accepted into an accelerator program you exchange a piece of equity as payment.
On the other hand, incubator programs are like an idea lab. So you have an idea but you don’t have the skills or time to formulate your business plan and find your audience. That is what an incubator program will help you with. You pay annual premiums or monthly fees to be in the program and you can stay for as long as you want. Acceptance rates are higher in incubators vs accelerators because founders are not vying for investment from the program.
Business Funding Rounds
Let’s take a look at the contemporary model for startup investment funding. There are a couple of funding rounds that lead up to the A, B, C funding series.
A bootstrapping period of building up momentum around a new business concept. This time is called pre-seed because it represents a business as a seed that hasn’t been planted in the ground. Since there are no adequate measurements of performance, funding comes from internal sources like savings, family, friends, crowdfunding, etc that sponsor a prototype and market testing.
Average Pre-Seed Funding Size: Less than $500,000
Seed funding, aka a seed round, roots your business into the ground. Your pre-seed investment shaped a marketable product hitting financial targets. Being a seed means you launched and are in the preliminary stages of building customer profiles, and a strategic sales funnel.
Seed funding comes from someone outside of your network. Your seed investor aligns with your aspirations and sees potential in your newly formed startup. Seed funding for startups is generally lower than series funding, but you could be applying for continued sponsorship from seed investors in your Series A round.
Average Seed Funding Size: $1M – $5M
A B C Funding
Series funding rounds typically happen in three series, A, B, and C. Let’s settle nomenclature with venture rounds vs Series A B C. They are often used interchangeably but they mean something different. If you are seeking VCs in your series round, which is highly likely, they can be venture rounds. They are called your series funding rounds when you are applying to angel or seed investors.
You must hit certain targets to secure investors for A B C funding rounds. Applying for large chunks of change means that you are a growth hacker, with a formidable plan to scale the company in 12-18 months. What you can promise in that time, and how you make good on that promise, will win each round. Here is how you know your business is ready to go for each series:
Series A Funding Round
The Series A funding round is for businesses that want to scale. Securing this investment means you have been in the game and you would like to mold the business into the best version of itself. Startups in Series A have a quantifiable financial history and are looking to improve and expand operations. This round can be the most difficult to attain because you need measurable metrics that prove your product can scale.
In Series A the goal is to gain significant funding and guidance. Your business will offer equity in exchange for leadership and of course cash, to support growth. Ideally, it is a simple process where you are reapplying to your network of seed investors. However, this is quite a jump in funding from a seed round so it is more likely you are bringing on a VC or angel investor.
Average Series A Round Size: $18M – $20M
Series B Funding Round
Your Series B funding round builds on the achievements of Series A. You should have a scalable business model that is earning revenue and is preparing to go public and/or become an enterprise. This stage is all about continued growth, investors will analyze year-over-year profits. A good pitch will include proven marketing, sales, and expansion strategies. Often you are asking your same investors from Series A for funding, plus a venture capitalist or two.
Average Series B Round Size: $30M – $40M
Series C Funding Round
In a Series C, you are close to the pinnacle of your business dreams. You are an established business with prospects to go public, or you already made an IPO and want a buy-out. On the one hand, by successfully hitting Series A and Series B milestones, Series C could be a sure thing from your current investors. On the other hand, if you are hoping for a buyout at the end, this could be the hardest funding round. Investors will scrutinize your financial position asking where can we go from here? Has your company already piqued?
Average Series C Round Size: $20M – $50M
Difference Between Series B And C Funding
Securing Series B and C funding is linked to your performance in Series A. You have a clear strategy for managing day-to-day operations, optimizing production, and driving growth. In Series B you are defining your strategy or pivoting based on proven financial KPIs. It is safe to say that you are still a small company working to increase market share and revenue.
Series C however is not only a continuation of Series A and B, you are enterprise level. You have the business model tried, tested, and true; you are expanding on the national and/or world stages. Series C provides the cash flow needed for large-scale operational maintenance. Scaling and profitability at this level cannot be done without exploring different revenue streams like selling stock or developing new products.
Series D Funding Round
Very few companies go on beyond Series C funding rounds. However, more venture rounds may be needed for companies with advanced goals. Sizing organizations nationally or internationally will require continued support, space, and labor. This is also reserved for enterprise companies who are shifting gears into new markets that need venture capital and consulting services in a new business sector. It is a method to speed up operations and enter a new market confidently and smoothly.
Average Series D Round Size: $50M – $60M
4 Ways To Prepare For Your Series Round
There is no set timetable for securing funding rounds. They will depend on several factors: your goals, funding needs, amount of equity you are offering, and financial statement preparedness. Let’s go through each of these items, in preparation for your series round:
1. Business Goals And KPIs
Most startups aren’t profitable in the first couple of years, hence the funding. When preparing your pitch for series A, B, or C, most investors want to see quick growth. To stand out with VC’s you should lay out your company’s formula for profitability. Essentially you need to present them with an ROI figure, how quickly that figure will be achieved, and why you and your team can make that happen.
Which KPIs should you be focusing on for profitability?
For Series A it is all about marketing. You may be earning revenue but the rate at which you scale is going to cost you more than your earnings. Don’t worry so much about turning a profit at this stage. Zoom in on sales and customer onboarding metrics like retention rate/churn rate, customer acquisition costs, time to first value, and customer lifetime value, etc.
In Series B and C your marketing and sales journey should be refined. So your KPIs are going to shift to revenue, profit margins, and how you are increasing your market share. A venture capitalist will be concerned with your cash burn rate, so with that provide an in depth analysis of your expenses.
2. Funding Needs
How much money do you need, and how long will it last you? Many start-ups and small businesses think the more money the merrier, but stick to what you need, and have a budget. Calculate your cash burn rate to get an idea of your investment funding needs for your essential operational expenses.
What is Cash Burn Rate?
It is a measurement of how quickly a business is losing money, or rather burning cash. It tells how long they can operate while paying necessary expenses. The calculation considers cash flow, costs, and sometimes revenue. Typically, accruals are NOT counted since it is a measurement of literal cash.
Gross Burn Rate = (Starting Bank Balance – Ending Bank Balance)/# of Months
What is Cash Runway?
Part of measuring cash burn rate is calculating cash runway or the life expectancy of a company. It is how many months a business can stay open, at current spending. If you don’t fundraise enough, the business is left with a short runway, risking death. Trying to raise more than needed for a long runway, is a waste of resources, and remember you are trading equity. Common practice is to raise enough money to last 18 months, giving you a year to hit your goals and a cash runway of 5+ months to look towards more investors.
Cash Runway = (Cash in the Bank) / (Monthly Burn Rate)
3. What To Offer Investors?
Have you ever watched Shark Tank and gotten lost in the negotiations with the Sharks? The jargon surrounding business investment can get confusing, but at its essence, they are bartering for a stake in the business. Investment offers can vary depending on what a founder is willing to sacrifice in exchange for the support and experience of a high-net-worth VC.
Typically startups will offer these forms of equity to investors:
- Convertible Debts to Equity: This is a loan that converts into equity, usually paid at the next round of funding. It is the most common form of payment to investors in funding rounds.
- Royalties: this is a payment to investors for the use or sale of an asset for a specified duration of time. This can be a unit payment per product sold or a percentage of sales.
- Employee Stock Ownership Plan (ESOP): a plan to pay out shares to investors when a company goes public, in the form of stock options, or preferred and/or common shares owned.
- Guaranteed Payments: a guaranteed payment to a new investor. These payments are typically reserved for those who sign on as active owners and are paid regardless of profitability.
- Active or Passive Ownership: investors can be partial owners of the company either with participatory roles or as silent owners.
Beware of Equity Dilution!
Be mindful of how much equity you are doling out during funding rounds. Otherwise, you’ll suffer from what is known as equity dilution. Equity dilution happens when founders are no longer equal owners in their business. This could negatively impact the direction and growth of your company, so think critically before giving out a portion of your business. While you may be desperate for working capital in the early stages, your needs could be solved by a small business loan.
I’ve learned one thing to say (repeatedly) to everyone, which is a simple “My startup does X.” Every investor wants to dream about how to make money from your product/service/team. So tell them what you do in a succinct fashion and let them dream—Scott James, Social Entrepreneur & Executive Mentor
4. Financial Statements For Your Funding Series
When you are preparing for A B C funding, it starts with financials. You need to display your measurable KPIs in a transparent and recognizable format. Let the numbers do the talking, and avoid exaggerated projections. Tell the story of where you are, and where you are going with these statements:
- 1-2 years of Cash flow Statements: This is your cash position for previous periods. You should be able to prove that you are managing investment inflows from seed or angel investors in a productive way.
- 1-year history of Balances Sheets: Investors are interested in your liabilities. What do you owe, and do your debts pose a risk to scaling? If you have a good history of managing what you owe, while also increasing revenue, then you should be good to go.
- 1-year history of Income Statements: It is all about net profit, what is the size of the pie, and what are your largest expenses?
- Cash Forecast: Based on your series funding, what will be your cash position for the next 12-18 months?
- Forecasted Income Statement: With your funding how will your income be affected? How are you leveraging R&D spending and transforming it into revenue?
- Forecasted Balance Sheets: As assets increase so will your liabilities, which accounts are going to be impacted by your funding round?
Securing Your Series Rounds
Your A B C series funding rounds keep the fire burning. With each successive round, you should stay on course for your overarching objective—IPO, buy out, market dominance. These rounds aren’t proof of value for your business, instead, they help you charge the path to market value and rise above the competition.