Angel Investor and VC currently provide the bulk of startup funding. Consequently, they are the most sought after types of financing for founders.
To reduce the level of risk and equity dilution, startup funding is spread across a number of stages or “rounds”. These rounds are a function of the business’s size and development stage. In this article, we will review the main startup funding rounds, from Pre-Seed to Series C.
Pre-seed rounds involve a relatively small investment (typically a few hundred thousand euros). Startups raise a pre-seed investment to reach a preliminary milestone such as building an MVP or launching a product.
As a result, pre-seed rounds usually take place pre-revenue. This means that startups will need to boast a strong founding team, a well-developed idea and a clear vision to convince investors.
This investment round is optional for many startups. They bootstrap as long as possible and decide to raise at a more advanced development stage.
Seed investment is the first large financing round a startup raises. The development stage of the company, the market potential and the type of investor (VC vs business angels) are key factors in determining the amount raised. Nevertheless, a typical seed fundraise ranges from €500k to €1m.
To be eligible for a seed round, a startup will usually have a functioning product and initial commercial traction. The objectives of this funding round are more advanced product development and iteration, team expansion and marketing. This is the real market test for the company. After a seed round, a startup should be seeking its product-market fit and start earning money.
Series A funding happens once a startup is starting to generate significant revenue and is looking to scale. This means that the company must have found its product-market fit and developed a sustainable business model. This is not anymore about the team and their idea. There needs to be tangible proof that the startup can become a business.
In practice, to qualify for Series A funding, the founders must have established a clear path to growth backed by pertinent KPIs (such as MRR targets, number of active users, etc). The goal of a Series A investment round should be to organise processes and actions around those KPIs to grow the business.
In terms of amounts, Series A funding tends to be in the €10 million range (though this varies considerably and round sizes are constantly rising).
Series B is market expansion funding. By that stage, your business model must be proven and the forward looking KPIs must be promising. The reason you need series B funding is to meet the demand for your products or services and/or to expand into new market segments.
To qualify for series B, your startup must have set up most processes that will lead to expansion: all you need is the cash to execute and grow aggressively.
The amounts involved in series B funding tend to be double or more those of series A. Again, they vary a lot have risen a lot in the last years).
If your startup is raising a series C investment round, it is usually to expand geographically or to acquire other companies. Your business should already be well established, which means that the level of risk involved with investing in it is considerably lower.
This means that at series C (and subsequently), startups tend to get access to other sources of capital than VC funding (namely hedge funds, banks or IPOs). The round’s amount will likely be €50 million or more.