Once you’ve established your compelling business idea and developed a solid plan to put it into effect, it can be humbling to admit that you may not know about the process of getting your start-up funded by investors. While we’ve touched on the topic of funding sources before, such as crowdfunding, the traditional route for exponential growth follows a predictable path.
In this article, we’ll be putting investment rounds in layman’s terms and citing some real world examples to give an overall idea of the process.
Types of Investment Rounds
Seed investments are the initial investments made by company insiders (private Angel investors, family and friends, or companies) that recognise the potential of a business despite being in its embryonic stages and high risk of failure. In this stage, the capital that is contributed allows for the founder(s) to iron out some of the persistent flaws and come up with a coherent product that is market-competitive. Many times this is carried out after a minimum viable product/offer is established and sets up the fledgling company up for future investments.
Wealthy private individuals (dubbed “angels”) or angel investment groups often become interested in a start-up’s potential realised by their initial efforts, offers, MVP’s or long terms plans. Angels often contribute funding for a share in the company equity. Often, these individuals provide guidance from their own expertise, as they often come from the industry of the prospective start-up. A good example of this type of investment and nurturing is Silicon Valley’s Y Combinator.
Series A Round
Hopefully, by this stage, a company has survived despite overwhelming odds, with a team of employees firmly established beyond the founders and a direction of future growth is realised. The company needs more investment to expand to new markets, reach new sales goals, and bridge shortfall gaps in capital, so they allow more investors to provide capital. Series A rounds often raise anywhere up to 10 mil (usually).
Series B Round
Series B rounds are indicative of a thriving startup on its way towards becoming a full-fledged business. With targeted consumers actively purchasing products/services and marketing campaigns are creating a substantial “buzz” in the startups industry (and beyond), the shift from pursuing investors to being pursued by investors becomes apparent. The main focus of a Series B round is to judge whether the company can guarantee its end of the bargain and exponentially scale its growth to compete with well-established business in a global market. Series B rounds usually raise anywhere between 7 to tens of millions of dollars.
Series C Round (and beyond)
Once a series C round is reached, the needs of the startup move into how to further dominate their markets while not diluting the equity that previous investors have contributed to position the company in its current state. There should be no difference between the start-up and its competitors. The company must use its resources to ensure that its valuation remains high to attract future investors to increase profits.
As you may have noticed, the letters of the rounds increment alphabetically. At this stage of investment, there are no predefined routes of investments. Series C leads to series D to series E and so forth. There is no particular route for a company at this stage to go, instead requesting funding as its needs grow and early investors part; or the company chooses to “go public” and offers shares to the public on the stock market as an IPO (Initial Public Offering). Series C round and onwards can be anywhere from 10’s of millions to hundreds of millions.
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As you can see, this is the simple overview of how a start-up can be financed. In reality, there are many different routes that occur, and some are not always linear. For instance, a company like Snapchat has gone to a series C round for $50M, to a series D at $485M on year later, to series E for $200M three months later (source). Still, the company is debating its future potential, as advertisers have noted that company may have difficulty monetizing its free service to make it a viable advertising source. This plateau may stop it from becoming an IPO. Uber, the revolutionary ride-sharing app, is on its series F round and is widely-anticipated as becoming a highly sought-after public offering.
More often than not, the initial start-up ideas by their founders are radically different than their end product. If the founders of Reddit had been successful on their first venture, the world may have had another food delivery app. Drew Houston, the cofounder of Dropbox, has a similar story, concentrating his efforts on college entrance exam materials instead of his revolutionary data-storage application. Others just happen to be desperate and unemployed, refining their idea until it revolutionizes their particular industry.
What remains a constant, however, is generally the start-up model’s rapid succession from seed rounds to angel investment rounds and beyond. Hopefully this article elucidated the mystery of seeking investments and just what stage your company may be in.