No two startups are completely alike. Their industries may differ along with their products, missions, and teams. But despite their differences, all startups go through the same fundraising journey, from seed to series, to raise the capital needed to sustain and grow their operations.
That journey is rarely a smooth one. Though it may look straightforward on paper, in reality, startups must be wholly aware of the nuances and requirements of each different type of funding round to maximize their chances of success.
Below, we’ll walk you through each stage and cover how you can succeed in each.
What are funding rounds?
Fundraising rounds are about securing the right amount of capital to support your startup. Generally speaking, between seed and exit, there are five different stages — each involving different types of investors, levels of funding, and expectations.
As a startup progresses further into its fundraising journey, larger amounts of funding, higher demands, and greater expectations will be imposed. This makes it important to carefully balance sustainable growth with meeting expectations and choosing the right investors.
Funding rounds and how to succeed
While the different types of investment rounds may seem similar in terms of the overall aim (i.e., securing capital), there are significant differences between them on a deeper level.
The seed funding round is the earliest stage of funding and the first major hurdle. Capital raised at this stage is often used for immediate needs, like developing a product or service, building a core team, and developing a go-to-market strategy.
However, startups at the seed funding stage do not have much of a market presence or a track record to showcase their profitability and are more focused on ideas than practicality. As a result, investors at this stage generally include angel investors, crowdfunding platforms, venture capital firms (VCs), and bootstrapping.
- Spend time developing your business plan with your team, paying particular attention to your startup’s overarching mission, target market, and goals.
- Start networking early to forge connections with similar startups, potential investors, and advisors.
- Conduct market validation to ensure that there is sufficient demand for your product/service.
- Recklessly hire for the sake of expanding your team.
- Accept funding without understanding future implications (e.g., crowdfunding may be attractive but may lead to very complex cap tables).
2. Series A
Startups at this stage would have already experienced some degree of success in terms of the viability of their product or service. However, they still have a long way to go.
Expectations are much higher in this round as startups turn towards more traditional institutional investors such as VCs.Nevertheless, alternative options, such as accelerators, are also commonly pursued. Funding amounts now soar to up to $15 million, requiring a Series A valuation (most startups at this stage are valued at around $2 to $15 million). Moreover, more attention is paid to the statistical practicality of your business model.
- Demonstrate with data how your startup is gaining traction and momentum.
- Continue to develop your business plan, clearly outlining how your company intends to grow and hit established milestones.
- Spend time developing the art of the pitch.
- Deliberately overvalue your startup’s valuation as this can demonstrate bad faith.
- Jump aboard any offer extended without careful consideration and expert counsel (e.g. lawyers).
3. Series B
Series B funding is similar to Series A, as it involves finding the resources to drive your startup forward. However, in Series B, startups are more established, with a proven concept and a valuation of between $30 to $60 million.
The investors at this stage are generally the same as in Series A, such as venture capital firms. However, as successful startups attract more attention and money, additional options become available, including hedge funds and private equity firms. On average, startups can expect to raise $25 million at this stage.
- Carefully balance the need to secure fundraising along with what your startup is agreeing to give away.
- Continue networking and relationship-building with industry players.
- Omit to actively look at future fundraising options well ahead of when your runway gets tight.
- Forget to monitor dilution constantly if you give away equity.
4. Series C and beyond
By the time your startup makes it to Series C, your startup should have already experienced a substantial degree of success. You may be now looking for a push as you start thinking about exit scenarios or hitting ambitious expansion goals. However, while Series C is often the final round before the exit, some startups may continue to Series D and beyond if they require additional capital for their goals.
Funding here can amount to $100 million while startups are expected to be valued at anywhere from $100 to $120 million. Like Series B, your startup here, due to its success, will likely attract several investment opportunities from previously mentioned investors as well as banks and more.
- With such large amounts at stake, it’s essential to not rush through the process.
- Carefully select your investors, ensuring a good fit.
- Lose sight of your startup’s mission.
- Neglect to trust your team – they’ve come this far with you and have insights you should seriously consider.
The exit round is all about your startup finding the means for its last sprint toward the finish line – either going public through an IPO or an acquisition. Expectations are as high as ever with investors expecting a significant return on investment.
Both approaches come with their pros and cons. Acquisitions can allow you to exit with significant returns but you may suffer from reduced autonomy. Likewise, going public may boost your visibility but can be far more time-consuming.
- Demonstrate a clear path to exit to your investors through a well-planned strategy.
- Meticulously go through potential exit scenarios and what those would look like (e.g. through LTSE’s scenario modeler).
- Rigidly stick to a single exit strategy – it’s normal for things to change and staying flexible is key.
Going through the rounds with LTSE Equity
As your startup progresses through different funding rounds, you'll quickly realize the importance of adapting to the nuances of each round. Various investors with different requirements and expectations will appear, making it crucial to tailor your approach accordingly.
However, one constant throughout all rounds is the importance of cap tables. Potential investors always review cap tables, so it's crucial to get them right.
To learn more about preparing your cap tables for fundraising, we invite you to read on.