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While possessing an excellent startup concept is crucial, the lack of funds to fuel its expansion may hinder its full potential, and, in certain instances, financial constraints could lead to the business losing momentum before gaining traction. This is where the role of securing startup funding becomes significant.
Securing investment from investors is a prevalent method for fostering business growth. However, comprehending the process is crucial for making informed decisions. This guide addresses key inquiries, such as distinguishing pre-seed and seed rounds, determining Series A readiness, assessing the necessity for a Series D round, and establishing optimal fundraising amounts, providing insights into each funding stage.
Before delving into the details, it's crucial to grasp why startups seek funding. Scaling a business incurs substantial costs beyond what most startups have or can generate from revenue alone. Operational expenses like salaries, marketing, and product development can quickly deplete funds. For many startups, sustaining, let alone achieving rapid growth, is challenging without external funding. Founders often seek investments from investors in exchange for equity, allowing them to finance the startup's growth from concept to a fully operational business and eventually to a self-sustaining or exit-ready large company. The fundraising process is likened to the racing arcade game Cruis'n USA in a webinar with the Founder Institute. Just as reaching checkpoints in the game extends your time, each fundraising round provides more time (runway) for the startup to progress toward the next funding stage.
Commencing with a pre-seed or seed round provides additional time on your startup's clock, progressing toward the next checkpoint—the Series A stage. Subsequent funding rounds, such as Series A to Series B, are facilitated by the funds obtained from the preceding stage. Each fundraising round should align with your business's growth, maturation, and achievement of specific milestones to demonstrate its investment worthiness to potential investors. In the following sections of this guide, we will elaborate on the milestones associated with each fundraising round, suggest suitable investor types for each stage, outline average funding amounts, and provide additional insights.
Pre-seed funding represents the initial phase of startup financing, typically occurring during the ideation or concept stage before the development of a minimum viable product or the generation of revenue. This round is instrumental in assisting the startup in team-building, prototype development, market research, and business model validation. Often sourced from friends and family, angel investors, or incubators/accelerators, pre-seed funding amounts range from a few thousand to tens of thousands of dollars. Crucial for initiating momentum towards subsequent funding rounds like seed, Series A, and beyond, pre-seed funding serves as a foundational step for startups.
Although not always recognized as an "official" fundraising round, it functions as a preparatory phase for the seed round. While pre-seed funding may not attract public attention, especially when compared to Techcrunch headlines, it serves as a vital source of initial capital for startups in the early stages, particularly those needing funding to build their Minimum Viable Product (MVP).
At this phase, you are in the early stages of development. You may have a Minimum Viable Product (MVP) or even just a mockup in Figma illustrating your product's functionality. However, your team might not be fully assembled, and the product may not be entirely developed.
When seeking pre-seed funding, ensure you have the following:
During the pre-seed round, investors are not only interested in your business idea but also in you as a founder. It's crucial to demonstrate why you are the right person to build and grow the company.
The pre-seed funding raised by companies can vary significantly, with numerous sources suggesting an average amount of less than $1,000,000, which is relatively high for this funding stage. According to a DocSend report analyzing 174 startups in the pre-seed stage, the average pre-seed funding amount was approximately $500,000 or less.
In certain instances, the pre-seed funding amount may be lower, influenced by the source of investment and your specific financial requirements. This seamlessly leads us to our next section.
The primary source of pre-seed funding typically stems from founders, friends, and family, contributing to the informal nature of this funding round. It's often not officially recognized as a distinct round. Many founders choose to bootstrap this phase, leveraging their skills to develop an MVP and conduct initial market research. In cases where external funding is required, friends and family might become involved, setting pre-seed funding apart from later rounds as it is frequently financed by one's personal network.
Another notable distinction is that pre-seed funds are commonly raised through instruments like a Simple Agreement for Future Equity (SAFE) or a convertible note, which avoids early company valuation, a crucial consideration for pre-revenue startups.
Bring on board co-founders, early employees, or advisors to contribute to the development of your company's product or service.
Identify market opportunities, analyze competitors, and validate the concept of your product or service.
Create a prototype or proof of concept to assess the viability of your product or service.
Collaborate with a designer or expert to create a compelling pitch deck tailored for securing seed stage funding. This deck should encompass essential information about the product or service, target market, and business model.
Seed stage funding marks the inaugural formal financing round for a startup, typically occurring after the development of a minimum viable product, showcasing some traction, and outlining a clear growth plan.
Primarily utilized for initial product development, building the founding team, and conducting market research, seed stage funding is commonly sourced from angel investors, venture capital firms, or crowdfunding platforms. The funding amount at this stage can vary, ranging from a few hundred thousand to a few million dollars, contingent on the startup's valuation and funding requirements.
Crucial for scaling operations and attracting subsequent investment in rounds like Series A, B, and beyond, seed stage funding plays a pivotal role in the growth trajectory of startups.
When pursuing seed funding, your company is expected to have progressed further than it was during the pre-seed stage. While the demarcation between pre-seed and seed funding may occasionally be unclear, especially for tech companies, certain milestones should be achieved by the time you embark on a seed round.
At this juncture, certain companies may already be generating revenue, reaching up to a couple of hundred thousand dollars in annual revenue, although it's not mandatory. What is essential is providing evidence that there is a demand for and positive reception of your product.
While revenue serves as the most compelling indicator of your product's value, you can also showcase it through social proof, including user feedback, mentions on social media, and press coverage. The objective is to convey to investors that you are developing a product people are willing to pay for, establishing the financial viability of your business.
Let's begin by noting that the average amount for seed rounds has seen a significant increase over the past decade, reaching a point where today's seed rounds are nearly equivalent to Series A rounds from ten years ago.
Crunchbase data reveals that the average seed round currently stands at $4.6 million, calculated from the average deal size across 14 different funds. As depicted in the chart below, this figure has experienced substantial growth over the past decade.
Certainly, the funding landscape can exhibit considerable diversity depending on your industry.
Take, for instance, Gong, which secured $6 million in its seed round, and OpenSea, which raised $2 million.
The key principle remains raising only the essential amount. Accumulating excessive funds prematurely may present challenges in subsequent fundraising endeavors.
To ascertain the optimal fundraising amount and timeline, the creation of a financial model is invaluable. Shameless plug, but Venturion simplifies this process, offering enhanced efficiency. You can delve into more details about it here!
Your seed round marks the phase where discussions with seasoned investors commence. Depending on the fundraising amount, friends and family remain potential contributors.
For larger funding goals in the range of hundreds of thousands to millions, exploring opportunities with angel investors and venture capitalists (VCs) is advisable.
It's worth noting that amassing an extensive list of investors isn't a prerequisite. Securing 1-2 VCs or angels for the round can be sufficient, eliminating the need to overcrowd your investor pool.
Series A funding represents the second round of financing for a startup, usually taking place after the company has validated its business model and exhibited early revenue growth.
Primarily utilized for business expansion, developing new products or services, and entering new markets, Series A funding is commonly spearheaded by venture capitalists and institutional investors. The funding amount in a Series A round can vary, ranging from several hundred thousand to several million dollars.
By the juncture when Series A funding is on the horizon, you've transitioned from the phase of "I believe this could work" to "I've substantiated its success, and now it's time to scale."
Indicators that a company is poised for a Series A round include:
At this stage, your business is experiencing growth, yet you've reached a point where additional funds are essential to capitalize on the momentum. Often overlooked in the trajectory of startup growth is the cost associated with scaling. The Series A round provides the financial means to sustain growth without being hindered by the available cash on hand.
Based on Crunchbase data, the average funding size for a Series A round in 2022 stood at $19.8 million.
It is increasingly common for startups to secure funding in the tens of millions for their Series A, evolving into more of the standard practice.
Similar to other fundraising rounds, the objective for your Series A should not solely be about raising the maximum amount of money possible. Instead, the aim is to secure sufficient funds to propel your business to the next stage of its development.
Ordinarily, VCs take the lead in Series A rounds, given the substantial amount being raised in the millions.
It's crucial to note that, at this juncture, VCs anticipate rapid growth. When presenting your pitch to them, it's essential to demonstrate a plan for achieving a 3-5x growth within the next 12-18 months and elucidate how their investment will facilitate this.
Regarding the selection of investors, Crunchbase has provided noteworthy data to guide you in the right direction.
Additionally, there is a high likelihood that investors from your seed round will express interest in contributing more capital during your Series A, making it a favorable starting point.
Series B funding marks the third round of financing for a startup, typically taking place after the company has experienced substantial growth, validated its product-market fit, and outlined a clear route to profitability.
Commonly utilized to expand the business, invest in research and development, and augment the talent pool, Series B funding is typically of a larger magnitude than the Series A round. While often spearheaded by venture capitalists and institutional investors, this round may also involve strategic investors or corporate venture capital firms.
The funding size for Series B can vary widely, ranging from a few million to tens of millions of dollars, contingent on the startup's specific needs and growth potential.
Only a fraction of companies advance to a Series A round, estimated at around 20-30% according to reports, and even fewer progress to Series B and beyond.
If Series A was focused on scaling and rapid growth, Series B serves as a seamless continuation with a primary emphasis on expansion. When considering Series B, envision your company as a mature adult, having surpassed uncertainties about its success.
At this juncture, your business likely exhibits the following characteristics:
Series B revolves around the expansion game, prompting efforts to broaden market share, international presence, customer base, team, brand, and various other dimensions.
As per Crunchbase data, the median funding amount for Series B until Q1 of 2023 stands at $25 million. Notably, the overall Series B funding has witnessed a significant decline compared to 2021, as depicted in the graph below.
The funding for a Series B can vary significantly among different businesses. For example, ClickUp secured $100 million in its Series B at the end of 2020, while Gorgias raised $25 million around the same period.
The key takeaway is not to benchmark your Series B amount against other startups. It's essential to raise the amount that precisely meets your business needs. Utilizing a financial model can be immensely helpful in this regard.
Venture Capitalists (VCs) are the primary source of Series B funding, often involving many of the same investors from the Series A round, especially when the business is achieving growth goals and milestones. As the business demonstrates positive trends in key performance indicators (KPIs), such as revenue, churn, and acquisition, securing additional funding becomes more straightforward, contributing to investors' willingness to invest more at this stage.
Series C funding marks the fourth round of financing for a startup, usually taking place once the company has gained substantial traction, established a strong market position, and has strategic plans for continued scaling.
This funding round is commonly directed towards extensive business expansion, potential acquisitions of complementary firms, or laying the groundwork for an initial public offering (IPO).
Typically spearheaded by venture capital firms, private equity entities, or hedge funds, Series C funding may involve existing investors or strategic backers. The funding amount for Series C can span from tens of millions to hundreds of millions of dollars, contingent on the startup's valuation and financial needs.
At this stage, your company should be in full maturity, establishing itself as a prominent player in the industry with substantial market share. Additional common milestones for a company approaching Series C funding include:
To sustain significant growth at this juncture, the primary approach involves substantial financial investment. Being a market leader, potential customers seeking your product are likely already aware of your presence, and your acquisition channels operate seamlessly.
Thus, initiatives such as introducing new products or acquiring complementary companies will have a considerably more substantial impact on your growth compared to increased expenditures on advertisements or marketing campaigns. Your growth is no longer solely fueled by generating awareness; it now involves exploring new avenues for revenue generation.
We examined various data reports to ascertain the typical Series C funding amount. According to Fundz, the average funding for a Series C round in 2020 was $59 million. Additionally, Crunchbase data on the average Late-Stage funding amount (encompassing series C and beyond) indicated an average investment of around $60 million in Q3 and Q4 of 2022.
Series C funding rounds follow the broader trend observed in startup funding, showing a substantial increase in the average funding amount over the years. Consequently, it is not unusual for startups to secure funding exceeding $100 million or even more in their Series C round.
In addition to the traditional investors like VCs, new participants, including hedge funds, investment banks, and private equity firms, may enter the scene during your Series C.
Series D funding is the fifth financing round for a startup, generally occurring when the company attains a significant level of maturity and aims to achieve specific objectives, such as venturing into new markets, introducing novel products or services, or gearing up for an IPO. This funding phase is primarily employed to propel the company's growth and solidify its standing in the market. Typically spearheaded by institutional investors, including venture capital firms, private equity entities, and hedge funds, the funding amount in Series D can vary widely, ranging from hundreds of millions to billions of dollars, contingent on the startup's requirements and growth potential. It's important to note that not all startups undergo a Series D funding round, as some may opt for an exit through acquisition or IPO before reaching this stage. In many instances, a Series C marks the final funding round for startups.
Following your Series C, companies typically encounter one of the following scenarios:
Consequently, less than 5% of startups proceed to raise a Series D round, and even fewer advance to later stage rounds (E, F, or G).
By this point, your company should have established itself as a dominant market leader, generating substantial annual revenue, potentially in the range of tens or hundreds of millions, and be actively pursuing an exit strategy, such as an IPO or acquisition. However, there are instances where a Series D round is sought specifically for funding an acquisition.
Based on our findings, the typical Series D funding amount falls within the range of $50 to $60 million. The specific amount raised can vary depending on the industry and the intended use of the capital. For example, Sprout Social, a social media management SaaS company, secured $40.5 million in its Series D round as part of its preparations for an upcoming IPO. Similarly, Getir, a grocery delivery app in Turkey, raised a substantial $550 million in Series D funding to facilitate its expansion into the U.S. market.
A notable advantage of a Series D round, in comparison to earlier funding rounds, lies in the reduced speculation or uncertainty regarding the fundraising amount. During this stage, companies typically have a well-defined goal and purpose for the funding round, with ample guidance from their finance team, investors, and board.
In the Series D funding stage, investors often include those from investment banks and private equity firms. Beyond providing capital, these investors bring valuable expertise to assist in preparing for significant events like an IPO, merger, or acquisition.
A notable distinction between early rounds and later-stage funding lies in their objectives. Seed rounds and Series A-B primarily focus on scaling the business. In contrast, the later stages (C and beyond) are oriented towards strategic preparations for an exit or acquisition, a characteristic that aligns with their typical funding sources being financial institutions.
Determine the Optimal Timing, Required Funding Amount, and Present Your Metrics to Investors, All Within a Single Platform. Book A Call.
Building a successful startup doesn't always require fundraising, as some ventures have thrived through bootstrapping. However, to create a substantial company with tens or hundreds of millions in annual revenue, raising capital is often necessary. While cases like Mailchimp exist as exceptions, it's crucial to align your goals and business vision when deciding between bootstrapping and fundraising.
Certainly, this content aims to offer valuable insights into the fundraising process, elucidating the prerequisites for each stage and assisting you in discerning the opportune moment for your subsequent funding round.
Always bear in mind that effective fundraising revolves around meticulous preparation and strategic foresight. Venturion streamlines this intricate process, empowering you to construct a financial model for forecasting future revenue, runway, and fundraising initiatives. It facilitates a comprehensive evaluation of the optimal fundraising amount and the most strategic timeframe for your fundraising endeavors.
Learn more about how Venturion can enhance your readiness for a successful fundraising endeavor.
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