You have the greatest idea. you’re on your way to creating a super-successful unicorn that’ll change the way people do things, there’s only one problem - you’re broke. We all understand that creating a company from scratch requires a lot of funds. No matter if it’s recruiting, finding an office, or having a business lunch, everything requires cash in hand.
When it comes to raising capital for a business, each stage of fundraising has its own unique characteristics that startups go through to secure investments. Each stage of funding represents a different level of development, risk, and growth potential for a company. In this article, we will explore the various stages of funding rounds and what they entail.
This is part one in an article series untangling the fascinating world of fundraising - this series will include guilds on dilution, funding rounds preparation, and a breakdown of types of funding rounds, investors, and more. Stay tuned.
Friends and Family (F&F)
The Friends and Family round is the initial stage, where a startup seeks funding from close friends, family members, and acquaintances who believe in the company's potential. This round is usually considered a pre-seed stage, where the company is yet to launch, and there is little to no revenue or traction.
During the F&F round, investors typically provide seed capital in exchange for equity or convertible notes, allowing them to convert their investment into equity later. The funding amount can range from a few thousand dollars to hundreds of thousands of dollars, depending on the investors' financial capacity.
Water the seed
After the Friends and Family round, the company has a baseline and now it’s time to gather the first major amount in the Seed Round. At this stage, the startup is usually ready to launch its product or service and has developed a prototype, conducted market research, and established some initial traction. To lay a strong base for future fundraising, this is the time a company usually turns to create an automated cap table and finds a decent funding scenario modeling to prepare for each round.
The Seed Round is the first significant round of funding for startups and typically involves angel investors, VCs, and other early-stage investors. These investors commonly provide funds in exchange for equity, with the funding amount ranging from $100,000 to $2 million. Unlike the F&F round, here funders are often to ask for special benefits while they invest in the company. Therefore most of them do not hold common shares but preferred shares instead.
The A round
The Series A round is typically raised after a startup has established a solid customer base, revenue streams, and a clear path to profitability. At this stage, the startup has likely generated some buzz in the market and is gaining attention from more significant investors.
Series A funding usually involves more institutional investors like strong VCs and private equity firms. The funding amount for a Series A round can range from hundreds of thousands to dozens of millions, depending on the startup's growth potential.
The well-known company Salesforce, for example, did not go for a seed round and F&F because some of its founders are very wealthy. They started in a serious A round ending in a total raise of $517K from 3 investors.
It’s time to B
The Series B round is being set in motion after a startup has achieved significant growth and market share. The startup has likely demonstrated a clear path to profitability, established a strong brand presence, and has a scalable business model.
This round completely depends on the success of the company and can strongly range in both investors and amounts. Some companies that struggle at this point but believe they have a strong and successful future often turn to SAFE funding.
Our previous example, Salesforce, raised in their round B $3.8M with 5 investors involved. Here the investors were wealthier but unlike in most companies, they are mostly private investors and not VCs.
The open Cs
The Series C and every round after at later stages are where startups have already achieved significant market share and can show sustainable profitability. They have now established a dominant position in their respective industries, some are preparing for an IPO or M&A, and others look to stay private and keep on growing.
These rounds usually involve larger to huge investors, such as hedge funds, pension funds, and other investment organizations. The funding amount for this kind of Series can widely range from a couple of millions to hundreds of millions of dollars, depending on the startup's valuation and growth potential.
Here Salesforce raised $13.2M, almost quadrupling the amount from the last round. Six investors were involved and the company did not stop there. From round C until Oct. 2022 the company went to 4 more funding rounds and raised a total of about $48M.
The various stages of funding rounds represent different levels of growth, development, and potential for startups. Each stage requires a different approach, strategy, and set of investors to help the startup achieve its goals. By understanding these stages, entrepreneurs can better navigate the fundraising process and secure the right type of funding to take their business to the next level.
If you are starting a company and thinking about how to come by all the money you need. Start with your close circle, don’t make your parents go broke but try to make enough to start moving. When you finally have something to show it’s time to start with the presentation, look at VCs and angels dedicated to investing in seed companies and go full power. Now it’s a game of success if your company goes well investors will knock on your door if you are still fighting to create your vision maybe consider raising in a SAFE, but that’s for another article.
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