The world of startup funding is filled with strange terminology and confusing verbiage, made all the more daunting by the fact that there seems to be no real consensus on the correct words to use.
It’s OK, we have your back. Whether you’re an entrepreneur thinking about launching a new product, or are just confused (like everyone else), we have a quick, easy-to-understand guide to the five main funding stages of startups:
Before any investors are going to give you any real money, you’ve got to prove that your idea has merit.
Seed-stage startups are generally comprised an embryonic idea, and typically it’s actually too early to really even call them startups. At this stage there might be one or two founders, and that’s usually about it.
Seed capital is most often provided by personal finances or friend and family loans. It would be very unlikely for any significant investments to take place. The seed stage takes a back-of-the napkin idea and seeks to prove its value in the marketplace. This might mean conducting market research, creating a minimal viable product (MVP), understanding the target demographic or any combination of all of these.
Sometimes also referred to as “the startup stage,” Series A funding is where the real investment begins to happen.
Series A is the magic moment when an idea transforms into a startup business. A business plan has been developed and the founders begin to pitch their product to investors. At this point the value of the idea has been proven, and an initial product has likely already been developed.
Funding during this stage is usually geared towards releasing the product into the wild — whether launching it or finding the right distribution channels. At this point the company may begin to take on additional team members as well.
Series A is the first meaningful outside investment, whether from friends and family, banks or outside investors, often nearing or exceeding the $1 million mark.
Yep, you guessed it, the “B” is because it’s the second big round of funding.
As the funding rounds progress, the dollars invested go up, as do the needs of the startup. At this stage the product has shown promise, likely established some kind of user base, and the focus is on scaling.
At this stage there is usually a business model developed, whether the startup is currently for profit or not. Series B-stage startups are sort of like teenagers: They’re starting to grow up, but not quite there, and steering the wrong way could mess the whole thing up.
Investors from the Series A round tend to take additional stakes at this point, but some new groups may come into play. At this point startups are receiving serious money from angel investors or venture capitalist (VC) firms, ranging from $7 to $10 million.
This is probably the round you’ve heard of before. At this third major stage of funding, the startup has gone from incubated idea to full-blown business.
Recent Series C rounds have raised anywhere from $25 million to $100 million. This is where companies are getting into serious money, and founders are starting to see their names mentioned in articles.
At this stage the startup is now an adult. The business plan is working, and they’ve achieved a significant and growing market share, with signs that it won’t be slowing down anytime soon. By this stage new investors are beginning to call, instead of founders having to constantly pitch, and new sources of funding begin to pop up, from hedge funds to investment banks.
It’s during this round that valuation really becomes important. You’ll hear that a company raised a certain amount based on a specific valuation. If they’re doing things well, the valuation rises with each round, meaning more capital raised with each round.
For some startups, Series C funding is the final stage before exiting.
Exit and less-common funding stages
It’s important to note that all of these funding rounds are based on equity investment, meaning the investment is made in exchange for a percentage of ownership in the company. However, some companies can take on debt capital, which is essentially a bank-style loan that doesn’t require giving up equity.
It’s also possible for startups to continue funding rounds into Series D, E and beyond. The ride-hailing service Lyft, for example, is well into Series G.
Some startups may offer sub-rounds, such as AA, AB, etc. This is generally more of a way for the startups to show that they’re still in the Series A stage of development, but require more capital to achieve their goals before hitting that next stage of growth.
Eventually investors in successful startups are ready to look for an exit. For the really big guys, this means an initial public offering (IPO) on a publically traded stock market. Companies like Google and Facebook went the IPO route, and anyone who owned company shares did pretty darn well.
For many startups, a successful exit means being acquired by a bigger company or merging with another company. In this scenario investors still typically receive a pretty nice payday, although it’s certainly not a given.
The lifecycle of startups
Understanding the different funding stages of startups can give you a clearer picture of where startups stand in the marketplace, as well as guide entrepreneurs as they create a vision for their idea.
Every company will be different, but the path of growth for startups tends to follow the arc from seed to exit.
The only question that remains is: Are you making the investment, or seeking it?