An Entrepreneur’s Guide To Series Funding For Startups
The stories of founders who built bootstrapped empires are inspiring. However, not every brilliant mind has the capital to make that happen. While some do start off with the savings they have, as the business grows, the need for more capital arises. That is when alternative funding comes into the picture. In this blog post, we will tell you everything you need to know about series funding for startups—from series A to IPO, we have covered it all. Read along!
What is series funding?
Series funding for startups refers to the different stages of funding, which help a startup throughout its operations lifecycle: from ideation to IPO. It is also popularly known as equity funding. One might wonder why businesses raise funds in rounds instead of getting bulk capital once and for all. The reason behind this is that, as the business grows, the need for capital arises in terms of recruiting more talent, developing existing products, building new product lines, researching new innovations, etc. Investing in rounds ensures businesses spend money more efficiently.
The key distinctions between funding rounds have to do with the valuation of the business, as well as its maturity level and growth prospects. Let us take a closer look at what these funding rounds are, how they work, and what sets them apart from one another.
Series funding rounds explained
One key thing to remember when it comes to series funding is that these rounds of funding happen at different stages in a business’s lifecycle. These stages can be categorized into the seed stage, early stage, expansion stage, and buyout/acquisition stage/IPO stage.
The seed-stage consists of the pre-seed and seed funding rounds. This is the initial funding that is required to get a startup off the ground. Seed funding rounds are usually small and focused on the research and development of an idea. While it can be easily confused with the seed stage, early-stage businesses generally have a tested prototype or service model and have developed a business plan. The growth and expansion stage is when the business actually starts seeing the anticipated demand and building products to meet it left, right, and center. It is also the stage where the business will expand in terms of customers, geography, etc. The final stage is the buyout/acquisition stage, where the sole aim of the funding is to improve the operational efficiency of the business before it goes public. Going public, or issuing IPO, is one of the main aims for many investors when they fund a business. It is the first sale of shares to the public by a privately owned company.
During the equity financing process, the company has to be able to establish its valuation and business/investment plan showing how it is planning to use the money it procures. The valuation of a business during its seed funding stage would essentially be different from its valuation during its IPO stage. Each round of funding will also, by necessity, dilute the company’s equity.
One must note that getting funding in multiple funding rounds is not an easy feat. But, having sound knowledge of what each round looks like can help you be prepared. Here’s what each round of funding for startups looks like:
What does the business look like in the pre-seed stage: The business at this stage has an idea that is being tested and experimented with. The team is engaged in continuous market research to understand the demand for the idea or product and its viability.
What is the valuation in the pre-seed stage: Difficult to value at this stage
Who are the potential investors in the pre-seed stage: Friends, family, and self-investment. Occasionally, incubators and angel investors.
How much fund can be raised in the pre-seed stage: Depends on the net worth of the close network the founder approaches
The pre-seed stage comes so early in a business’s journey that often, it is not even considered a stage of equity financing. It is the stage where an idea is born and research is done to understand how impactful the product might be in the current market. This stage is also called the bootstrap stage as most of the founders end up using their own money and burn the midnight oil to come up with a product-market fit. This is also the stage when the founders start talking to other founders and businessmen to understand how to go about building their idea.
Bonus: We love it when founders build bootstrapped empires. So we started our “Bootstrapped Heroes” series to celebrate the passion and grit of entrepreneurship. Here is one such story of Zoho, a bootstrapped million dollar giant.
What does the business look like during seed funding: The business has started developing the product and is ready for launching it in the market. It also has an able team that works around the clock to get the business going. It has started building traction and sees revenue trickling in.
What is the valuation during seed funding: $3M-$6M
Who are the potential investors for the seed round: Angel investors, micro-venture capitalists, crowdfunding, institutional investors
How much funds can be raised during seed funding: $10,000 up to $2 million
Seed funding round is the official first round of getting external investors to invest in your startup. In this stage, you have a team working on developing your idea into a tangible product. You have also prepared yourself for launching the product in the market and have started seeing traction. Since the investors are taking a huge risk by investing capital at this stage, they expect a share of equity in the business. The ideal equity percentage to be given here would be 10%, but it isn’t rare for investors to ask for up to 20% at the seed funding stage. This stage is often considered the most important stage to see if a startup will be successful.
You can read all about seed funding in our blog post, A Comprehensive Guide To Seed Funding For Entrepreneurs.
Bonus: Know how preseed and seed funding rounds differ in our this guide.
Series A funding
What does the business look like during series A funding: At this stage, the business has consistent revenue flowing in. It has the core team inducted and is ready to scale your business. The business at this stage is looking for new customer bases and is expected to grow.
What is the valuation during series A funding: $10M-$15M
Who are the potential investors during series A funding: Venture capitalists
How much funds can be raised during series A funding:$2 million to $15 million
Series A funding is the first round of venture capital funding. At this stage, you have a high-demand product that is seeing consistent revenue. You have an enthusiastic customer base that is buying your products regularly. You are looking to expand your reach to other markets. This is basically the stage where fundraising needs to be taken more seriously. This stage involves a lot of meetings and networking with potential investors to ensure you raise funds to grow your startup. This round is often led by one lead investor, called the anchor, and supported by a few other investors. The equity dilution at this stage usually tends to be between 15%-25%. Getting your first investor is key to creating an impression and getting more potential investors to invest in your business. Well-known venture capital firms that participate in Series A funding include Sequoia Capital, IDG Capital, etc.
Bonus: Here’s a list of the top 40 most active venture capital firms in India for D2C and eCommerce businesses
Remember, investors at the Series A funding stage are not only looking for great ideas, but for firms that show high growth potential and the chances for high returns. Only 10% of seed-funded companies are able to raise series A funding.
Series B funding
What does the business look like during series B funding: The business at this stage is looking for more expansion opportunities. It has a highly agile team working on building and developing the product for a wider market. The team meets with investors all the time and looks to increase its market share. It is also looking at outliving its competitors in the market.
What is the valuation during series B funding: $30M-$60M
Who are the potential investors during series B funding: Venture capitalists, late-stage venture capitalists
How much fund can be raised during series B funding: $7M-$10M
If you’ve had a successful tenure after raising Series A funding, the next big leap is Series B funding, which is all about expanding your team and your market reach exponentially. By this time, your business is highly successful and has proven to investors that you have the capability to scale your business significantly. While many businesses get the same VCs to lead the round, the difference would be the addition of a new set of VCs who have seen your business grow and are interested in being a part of the growth. Another prominent goal of Series B funding is to outlive your competitors and be a leader in your space. Remember, with each round, the equity percentage available to dilute also decreases while the business’ valuation dramatically increases.
Series C funding
What does the business look like during series C funding: You are in a position to acquire smaller startups whose values align with yours. You are looking to build new products and reach a global market. You are also focusing on building up your company to make it public.
What is the valuation during series C funding: $100M-$120M
Who are the potential investors during series C funding: Late-stage venture capitalists, private equity firms, hedge funds, and banks.
How much funds can be raised during series C funding: $30M-$100M
If your business has reached this stage, it means you’re on the right track. Not many startups get to see this stage due to products that are not highly scalable. At this stage, your focus is on building new products, reaching new markets, and even acquiring other underperforming startups in a similar industry. Now that you have proven yourself in the market, the chances of getting more funding for your startup are higher than ever. Investors are always on the lookout for startups that have proven their market fit and are on the path to going public. The most interested investors in this round would be hedge funds, private equity firms, and investment bankers. These investors aren’t looking for a lot of risks, and prefer to invest in mature firms that have proven profitability.
Series D funding
What does the business look like: You haven’t achieved the targets you wanted to with Series C funding.
Who are the potential investors: Late-stage venture capitalists, private equity firms, hedge funds, banks
How much funds can be raised: $50-$60 million
In most cases, startups file for IPO after the series C funding and won’t have to go for Series D funding. This is required mainly in situations where a startup has not been able to achieve the targets it had set during the previous stage of funding. This can also be helpful in the case of a merger. This is primarily for startups that haven’t gone public yet but are looking to acquire smaller startups to stay afloat. However, there is no last stage of startup funding. If a startup has more advanced revenue goals, then it may go on to get series E, F, G, and more.
An IPO or Initial Public Offering is the process of offering corporate shares to the public for the first time. While growing startups issue IPOs to get extra funding, established startups use this as an opportunity to pay back their investors and shareholders. At this stage, you have a highly efficient, growth-oriented team. You also have stable financial statements and great corporate governance developed.
What we recommend
Most often than not, funding can get messy, time-consuming, and become a nightmare. If all this seems too complicated for you, we have a solution. If you are looking for a flexible, highly scalable, 100% digital process of raising funds that require no equity dilution, we recommend revenue-based financing. This founder-friendly approach lets founders raise funds without diluting equity, and the repayments happen as a percentage of monthly revenue. You can learn more about revenue-based financing and how it works in our article here.
Being India’s largest revenue-based financier, Velocity provides founder-friendly revenue-based financing to growing DTC businesses. If you are a D2C brand looking for funding to manage your inventory and marketing needs, apply here, and get funded within 7 days.