You have heard by now terms such as seeds funding, Series B funding, and so on. So, how many startup funding rounds there is? What do these rounds mean? And finally, what is the definition of a startup funding round? The startup ecosystem in Europe is booming at the moment. To understand these terms, you need to understand the meaning of startup funding round.
The path for each startup is somewhat different, as is the timeline for funding. Many businesses spend months or even years in search of funding, while others (particularly those with ideas seen as truly revolutionary or those attached to individuals with a proven track record of success) may bypass some of the rounds of funding and move through the process of building capital more quickly.
The rounds are stepping stones for the startup, and the company receives enough money to grow and meet the goals. Each round of investment can take between 3 to 12 months depending on the entrepreneurs, startup, market. Funding rounds are divided into the following.
Pre-seed
Seed
Series A
Series B
Series C
Initial public offering – IPO
Pre-seed
A Pre-Seed round is a pre-institutional seed round that either has no institutional investors or is a very low amount. Pre-seed funding is the first stage of investment in which the entrepreneurs are trying to build the groundwork for their idea. Although this stage is not very common, it may come up early in the startup’s journey. Most startups skip this stage and go directly to seed.
At a pre-seed stage, startups might have built an MVP and launched a beta. Furthermore, it’s very likely that the startup has identified a significant market opportunity and is testing its hypothesis or conducting research.
In most cases, startup founders, family, and friends will fund startup funders. However, startups raised money with pre-seed funding rounds in particular in Europe. For example, a newly established FOV Ventures targets investments ranging from EUR 250000 to EUR 0.5 million in 25 companies.
Seed
Some startups skip the pre-seed round if they raised money from their friends and family who helped them with their growth. Therefore, for many small businesses startup seed funding round is the first stage of the process. At this stage, you are usually looking to scale up to full market production and product development will be complete. You might have previously had a prototype or limited manufacturing run as proof of concept. The equity in exchange for the seed funding in this stage is usually between 10%-25%.
It is important to note that the seed funding is risky, as the company and its product were not tested in the market. If your startup manages to pull through this stage, your business will most likely make it to the next round.
Series A
At this stage, your startup should have factual data to show for the money invested earlier and has an established user base and revenue coming in. This funding is intended for scaling up your startup and growing potential to new markets. Venture Capital firms will usually back companies at this stage.
According to CFI, series A financing is a type of equity-based financing. This means that a company secures the required capital from investors by selling the company’s shares. However, in most cases, series A financing comes with anti-dilution provisions. Startups usually issue preferred shares that do not provide their owners with voting rights.
Europe’s early-stage investor base (number of active investors) has massively grown in the past few years. Europe has witnessed an increase in the level of investor collaboration. Some of Europe’s series A investors are Idinvest Partners, High-Tech Gründerfonds, Octopus Ventures, Index Ventures and Partech Partners.
Series B
Your company can opt for series B funding after four to five years of operations – when it deems suitable. In many cases, companies don’t opt for series B funding because they tend to become profitable after five years or so. Startups that reach the series B investment level have usually expanded their user base and plan to become enterprises.
For financial services subsectors, a total of 14 U.S. companies closed Series B rounds of $100 million or more in 2021. Financial services saw the largest growth in median round size, which more than doubled year over year.
In Europe startup Accel raised $500 million for Accel London V, a fund focused on Series A and B investments in Europe.
Series C
Startups that have made it this far, now want to expand their reach into new markets or create new products. Expansion to acquiring other companies is also a possibility. The Series C round is the fourth stage of startup financing, and typically the last stage of venture capital financing.
In most cases, startups are looking to take their product into new international markets. In this stage, venture capitalists on angel investors are looking to finance large sums of money into companies that are already winning to allow them to secure their leadership position. Series C is often the last round that a company raises. In rare cases, startups go for even bigger investments in series D, E, or beyond. For example, recently, iPhone refurbisher Swappie raised $124M Series C led by Verdane to scale in Europe.
Some of the key drivers for growth are achieved through honing and perfecting the customer experience, rapidly expanding sales/marketing functions, and hiring key executive talent.
Finally, it’s more common that a Series C round is a final push to prepare a company for its IPO or an acquisition.
Initial public offering – IPO
Many startups use Series C funding to increase their valuation for an IPO, which is the process of opening a private company’s shares to the public. Therefore, an IPO allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment. Meanwhile, it also allows public investors to participate in the offering.
In the startup world, this is considered a success. This allows the initial investors such as family, friends, angels, and VCs to sell their startup ownership to retail and corporate investors. A strong pipeline of companies went public either through an IPO in 2021. An example is Affirm, which saw its stock price jump 100 percent on its first day of trading before closing out at $97.24. Affirm is a big player in the increasingly popular “buy now, pay later space,” which also includes companies like AfterPay and Klarna. Since it went public in mid-January, the company’s stock has moved up and down, but overall its trajectory stayed positive.
To Sum Up …
Every startup founder has to go through these stages and startup funding rounds to create a successful business. As mentioned in this blog post, the first round is known as the pre-seed or seed round. In later stages of the startup lifecycle, companies go for Series A, B, C until finally they go public.
