Raising Capital: Series A, B, C,Z... What does that mean?

The road to growing a business isn't always straightforward. While we may think that a great product or service can guarantee success, it often isn't enough in reality. Unfortunately, our own capital frequently needs to be supplemented by funding from investors. 

Most start-ups aren't able to consistently grow using personal funds or finances from friends and family. Getting a business off the ground can be challenging, and external funding is one of the key ways to help it out. Here are the primary concepts to consider at each stage of investment.

Seed Funding

Our first step is to look at seed funding. This helps our start-up get going in the market and is the preliminary stage of investment. Later on, series funding can provide our company with huge cash injections. Despite this, many businesses choose not to continue and settle for what they have. But if we're confident in our product or service idea, the natural progression is to engage in series funding rounds.

Series...A, B, C...

Series A, B, and C funding rounds are the primary ways that we can secure investments. Through this process, we can sell equity in our company for cash. With the extra capital, we can more easily expand our business and make it profitable. The benefit for investors is that their share in our company grows alongside it.

Average Valuation

One of the key aspects that decides whether a series funding round is successful is average valuation. This analysis estimates the current value of our business along with its potential to grow. Investors then use this figure to decide if our company is worth their capital.

Business Goals

Each stage of Series funding will help our business to achieve a specific goal. We'll also need to grow our business to a certain point before moving onto the next series. Each step we take in the funding process should feature a plan detailing where we want to take our business.

Investor Types

Each series involves different types of investors. Our business will become more appealing to backers as it expands. This attracts potential shareholders looking to make a larger investment. If we manage to attract the support of a wealthy backer in Series A, it'll become easier to secure other prominent investors.

When conducting the funding rounds, we must keep in mind what the potential backers are looking for at each stage. Continued growth costs exponentially more as we expand; investors will need further convincing during later rounds. Without a proper premise, we could find it harder to secure funding as we progress.

What Defines a Series Funding

Series funding rounds are the various stages that companies participate in to try and gain investors. With each step, we can present our business model and product idea to potential backers. 

Types of Investors

Each stage also includes various types of private investors, from individuals to large venture capital firms. Investment firms are more common at later funding stages. In early phases, especially during the seeding stage, angel investors are the most frequent.

Angel investors are anyone that exchanges their capital for a share in the business. By providing us with extra cash, they can hopefully earn a return on their investment when the company grows. These investors mainly support start-ups that have a high chance of becoming successful relatively quickly.

Start-up Stage

Seed funding usually takes place before entering into series funding. While many investors can take part in seeding, the total capital gain only ends up between $50,000 and $2 million. The various series rounds are defined by even larger contributions that can reach several millions in later stages. Instead of multiple angel investors, this capital mainly comes from a smaller group of wealthy shareholders.

Series Funding Rounds

Another defining aspect of series funding is its different levels. From A to C, each stage functions as a separate way to take our business to the next level. It's not uncommon for a company to only take part in one or two rounds to reach its goal. We might find that Series A funding is all we need to reach our goals for our business.

There are many points to consider that can increase our likelihood of securing an investor. A strong pitch is fundamental in the early rounds, as the business still needs to prove its potential value. We also need to organize all aspects of each series funding. Everything, from picking and contacting investors to scheduling meetings and presentations, is our responsibility.

Series A Funding

The round of Series A funding is our first significant attempt to gain investors for our business. While seeding allowed us to kickstart our idea, Series A can let us make our first considerable expansion. It's our first round of venture capital financing instead of the start-up financing acquired from seeding. Here, we can try to sell preferred stock to potential investors.

Preferred stock has priority over the common stock that we can sell to the public. They’re issued mainly to financial investors and other people directly involved in the company. These include employees, managers, and ourselves, as the business's founders. While these shares have the same common stock benefits of voting rights and profits, preferred stock receives dividends first. Investors are somewhat protected if the company liquidates, as they are the first to receive their payments. 

Average Valuation 

We should only try and organize Series A once our business has a track record of consistent revenue and customers. This helps us create a convincing pitch for potential stockholders. Our average evaluation will be much stronger once we've used our seeding funds to build a base of operations. At this point, our company should be valued at around $20 million. Investors want to know we can turn their capital into profit, as Series A investment sizes range between $2 million and $10 million.

Goal of the Company

Our goal with this investment is to turn our business idea into a model that’s profitable in the long term. We can do this in many ways, like expanding our product to new markets. A detailed plan is essential to show investors. Series A funding aims to grow the business over the next six months to two years, so mapping out the expansion process is crucial.

Investor Types

At this stage of funding, venture capital firms are the most common investor type. There's also the possibility of attracting more angel investors as we're still in an early funding stage. Usually, Series A capital will come from a single shareholder. This initial backer is the most important to acquire, as it can cause other venture capitalists to take an interest in our business. 

Unfortunately, Series A funding is also the most difficult step. It can often take 30 attempts to find a single willing backer. Many investors will be skeptical of our company, even after securing start-up investment. This leads to businesses using equity crowdfunding to raise their capital, which involves selling equity to the general public.

Series B Funding

If a business reaches Series B funding, it means they’re already developed. By this point, we have an established customer base that’s bringing in consistent revenue. Further growth now requires us to expand our product into other markets to attract exponentially more customers. We can do this by improving on every aspect of our company. While Series A helps us become initially successful, Series B aims to take everything to the next level.

At this stage, preferred stock is still the primary form of equity that we sell to investors. Shares usually also have an option to convert into common stock in Series B. This provides extra choices to shareholders since they are investing substantially more into our company. Converting preferred stocks to common stocks is risky but can potentially make greater profits if the business is successful.

Average Valuation 

Since we’re past the development stage, our company has already built up its core features and functions. The funding from Series B needs to expand upon each of our business functions. This leads to average investments that stretch from $10 million to $20 million. Potential backers typically only consider companies valued between $30 million and $60 million for this sort of funding.

Goal of the Company

The goal of this round of investment is to improve on everything we’ve already established. This includes advertising, technology, IT systems, and employees. Since our business is looking to become a significant player in the marketspace, investors usually want around 33% ownership.

Investor Types

Many new investors will take an interest in our business if we manage to secure Series A funding. Previous shareholders may choose to increase their investment, while venture capital and private equity firms become more common. Series B funding usually requires fewer investors, as new stockholders will spend substantially more on their shares. This is because our business is already established and carries less risk. 

Series C Funding

Series C funding rounds are the third injection of capital into our business. While it's possible to continue into further rounds, this is the final stage for most companies. The preferred shares we sell to investors are now mainly convertible. 

Average Valuation

Making it to this last round means our company has almost reached its peak. We've proved that our business idea is profitable in the long term for investors. Our average valuation at this point should be at least $100 million. Unlike previous evaluations, this number is usually based on our current performance. Investors now don't have to predict our success since we've already achieved it. The downside of this is that further expansion will cost substantially more, with Series C funding reaching $50 million.

Goal of the Company

Since we've firmly established ourselves as a major company in the market, our aim is now to widen our reach. With many millions in funding behind us, global expansion is the next step. This can include anything from new product development and market research to buying out smaller companies.

Investor Types

Our business has now passed the start-up stage. Its size causes each new investor to receive a smaller ownership percentage, as we’re already profitable. It's common for previous investors to return now that they've seen our successes. We could also see interest from much larger backers, including hedge funds and investment banks.

Conclusion

It's essential to understand the various aspects of each series to grow our business successfully. Before entering into a round of funding, we need to establish our goals and how we will attract investment. 

The aim of the different stages is to grow our company to a certain point using the estimated funds we'll receive. Not every business needs to progress through every series to be successful. The aim of funding is to turn our idea into a success, which is a definition that varies between businesses.

Being aware of the investor types in each round will help us organize a successful funding series. We need to know what they're looking for in a business and our average evaluation. Our investment risk and customer base will be different at every stage, and taking this into account can help us secure the funding we need.