Pre-Seed, Seed, & Series Funding terms always sounded foreign to me, a lingua I didn’t understand. More prominently this year, I started to follow the happenings within the tech-eco system, and these terms were reoccurring day in day out. I usually just got excited for the parties involved, though confused, I knew it was good news.
I assume you are in the same state of confusion as I was, and that is why I will spend the remainder of this post explaining to you in detail what these startup funding terms mean. Including words like Angel Investor, and Venture Capital Firms. After this article, you would become familiar with these terms, and be able to relate to them when next you see them in news headings.
With no further ado, let’s get started…
Pre-Seed Fund (Bootstrapping)
A Pre-Seed Fund (often used interchangeably as bootstrapping), is the earliest fund a company enjoys at its initial stage. At this stage, there’s usually no existing product or working prototype. All the company has at this stage is an idea.
Funds at the Pre-Seed stage usually come from the founders themselves, founding members if any, parents, family, and friends.
At this stage, operations of the company are usually just getting started, and most of the investment funds are of goodwill, and not in exchange for any equity or stake in the company, except requested by the investing parties.
Seed funding is the stage right after Pre-Seed funding. At this stage, the business/company has already kicked off operations, there might be or not be a working prototype or product. But at this stage, there is a workable business plan with a semblance of possible prospects.
Seed funding helps the business to transition from bootstrapping into a full market scale. Funds generated at this stage help the company to hire needed individuals to work on the product, conduct intensive market research, and launch the product.
Funding during this stage ranges from $10,000 to $2 million and usually stems from family, friends & angel investors.
Angel Investors (also known as Seed Investors) are usually individuals with the financial capability to back indiviuals or startups at the intial stage of their operations. These type of investors fund businesses in exchange for some equity or ownership in the said company.
Depending on the value of the seed fund, some founders might not see the need to seek more funding, and might not go ahead with series funding.
Series Funding are different stages in a company funding raising, each one higher than the previous, and proportionally equilivalent to the company’s growth, and revenue production. These type of fundings come with exhange of some equity, stake or share in the company after due validation procedures have been conducted for the company.
The different stages/series of fundings are identified alphabetically as Series A, B, C, D, and E.
Series A Funding
This funding comes right after the seed funding. At this stage, the company is expected to have a viable track record, and proven business plan.
At this stage, it is expected that the company already has a set of consistent users, some product offerings, and the generated revenue is able to cater to the basic operation cost of the company. A company seeking to raise Series A funds is expected to be valued between $10 million to $15 million and is expected to raise between $2 million to $15 million.
Investment at this stage usually stems from multiple angel investors, and/or venture capital firms.
Venture Capital Firms provide oppourtunities to startups, and companies similar to angle investors, although some firms, include mentorship along with the funding they provide.
Unlike angel investors who are high net worth individuals, venture capitals firm consist of multiple high net worth individuals, investment banks, and other financial institutions. Hence, funding from venture capital firms is more than those from angel investors as well as their involvement in the business.
Series B Funding
Series B is the second major round of funding a company undergoes. At this stage, the company already has an established user base, a product offering that has scaled, and a proven track record of success, and revenue generation from previous fundings to respective investors.
Funding at this stage is meant to scale the business to a large market scale, grow the company’s reach, and venture into new territories. Investments are this stage is usually made by two or more venture capital firms, with one leading the investment, and drawing in other investors.
Companies seeking to raise series b funds are expected to be valued between $30 million and $60 million with an expected estimated average raise of $33 million. Source: Investopedia
Series C Funding
This stage of funding usually serves as the last funds raising attempt for most companies before acquisition or an initial public offering.
An Intial Public Offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. An IPO allows a company to raise capital from public investors. Source: Investopedia
Companies that make it to this stage seek funding either to increase their valuation before the acquisition, be able to acquire other companies in a similar industry, scale beyond their current market reach, or venture into a new product.
At this stage, there is less risk involved in investing in these companies as not only have they proven themselves to existing investors but have become a highly profitable venture themselves. With this, more investment firms such as hedge funds, private equity firms are open to investing.
Companies that raise funds at this stage have valuations of $100 million or more, and this valuation is based on existing data rather than predicted expectations.
Series D, and E
Most companies end their equity funding at the series c stage and hardly go further. Companies that engage in series d and e funding desire to still expand their market cap before going public or do not desire to go public yet.
Investors at this stage rarely have a major influence in the running of the company, and rather trust the company to wisely spend the invested funds.
In this post, we have learned that there are five major stages of startup funding, which come after the pre-seed, and seed level funding.
We have Series A, B, C, D, & E which all come with the increasing growth of the company, with each investment stage more than the previous one.
We’ve also learned that most companies end their equity funding at Series C, with most opting for public investment via an initial public offering.
By now, I expect that all your questions as regards the different stages of startup funding have been answered. Paravadenure you have more questions or need further clarity, don’t hesitate to reach out to me via Twitter, and I will be happy to answer you.