We all know that getting your startup off the ground is no easy feat. And it doesn't get any easier once you leave the launch phase in your business behind and enter the funding phase. As a startup, you can expect to start from scratch and end up somewhere completely different than where you started. But what does that mean for your business? How do things change? Where are you going to have to step up your game? And what kind of money will be involved? You should have answered these questions before diving headfirst into VC funding. Let's take a look at the different types of funding most startups require when creating their business plan – there are three in particular that come up time and time again:
Series A funding is the first type of funding most startups will turn to. It is a large investment round, typically between $5 million and $25 million, although it can vary dramatically. This funding is used to expand a business's operations, whether new offices, hiring new staff, or marketing campaigns. To qualify for Series A funding, you will likely be required to have proof that your product or service is viable and in demand. This is where a thorough and well-researched business plan comes in handy. A successful Series A round will typically require an investor to have a high enough stake in the company to have a say in the operations. You will typically see a relatively high percentage of equity and low-interest rates. This may mean you must give up a large portion of your business and wait a long time for the cash injection to come through.
The Series B funding round is the next kind of funding you may come across. This round is typically between $25 million and $100 million. It serves as a way to bring a business to the next level. Some businesses may take this funding round instead of a Series A funding round to maintain more control over the company's operations. Depending on the company providing the funding, they may have a stake in the operations and a say in the company's future, or they may be a minority investor. A successful Series B funding round may result in a lower percentage of equity than in a Series A funding round. Still, you may be required to give your business a larger amount. Like a Series A funding round, the money may be given to the business as debt.
The final type of funding we will discuss is the Series C funding round. This is the largest investment round, typically between $100 million and $500 million. The money is often used to make significant operational changes in the company to increase its potential for future growth, or it may be used for something entirely different. This is the largest investment round, which means the investor will have acquired an even larger stake in the company than in the Series B funding and will have a large amount of say in the direction of the company. A successful Series C funding round typically results from a company that has already shown significant growth and has a clear path to future success. The company can provide extensive details on how it will use the money to fuel growth and become a market leader.
The first type of funding you will receive will be the seed round. This typically comes from friends, family, and co-founders. There is usually no equity exchanged during this round, so you will not lose any company ownership. Suppose you need to raise more than the initial money you received. In that case, you may be required to give a portion of your company to the people who provided the seed round. This type of funding is typically very low-risk for the investors. Still, it also means that the investment will not likely generate much return. This can make it much more difficult to raise the second round of funding if your business struggles to find its footing in the marketplace.
The venture round of funding is typically the second investment round. It is very similar to the seed round. Still, it often comes from a larger group of investors hoping to make a larger return on their initial investment. This can make it a little more difficult to raise the venture round than the seed round, as you will usually have to offer a larger portion of your company to the investors to secure their funding. The venture round of funding is typically between $1 million and $5 million, which is enough to help a business get off the ground but not enough to expand its operations. Venture rounds may sometimes be referred to as a "pre-seed" round of funding. The main difference between the two rounds is the funding being provided. A venture round usually has a fixed term, and there is often an option for the investors to convert their investment into equity after a certain period.
The bridge round is typically the last round of funding that a company will need before going public. It is used to help the company make it to the next level of funding. A bridge round may also be used to replace a previous round of funding if the company is looking to change the terms of the agreement. Suppose you cannot find a large enough funding source to fully help you expand your operations. In that case, a bridge round may be used to help you meet certain milestones. A bridge round may replace a smaller round of funding or for a specific purpose. For example, the funding may be used for marketing, patenting new products, or research and development. You may also see a combination of different types of funding being used to make up the bridge round.
Finally, it is important to note that there are a few other ways to get your hands on the capital you need to grow your business. You may be able to negotiate for someone to take a loan out in your name in exchange for a set percentage of your business. You may also decide to offer shares of your company to people willing to make an equity investment in your business. This allows you to take on less debt, but it may also mean losing a large percentage of control over the company. Finally, you may be able to negotiate with a co-founder or a friend willing to make an equity investment in your company in exchange for a percentage of your profit. This is a good option if you need a large amount of money to help your business expand.
The series of funding rounds can grow in size as your company grows, but they do not go on indefinitely. Certain milestones will be reached, after which the company owner may need to restart with a smaller seed round. Most tech startups begin with a seed round and continue with series A B C funding. Seed funding is typically provided by individual investors (who may be friends or family of the founders), angel investors, or venture capital funds. Seed funding may be provided as a convertible note, meaning that it is initially provided as a loan with a high likelihood of being converted into equity. Series A B C funding comes from VC funds and is likely to be provided in the form of equity. The amounts of Series A B C funding vary widely. Still, they are typically multiples of $5 million, with $25 million at the high end of the range.
Finding the marketplace's distinction between Series A B C funding rounds is critical. It assists in maximizing the firm's exposure to viable investment sourcing. The process of each round works mostly the same. The difference is risk tolerance, which attracts various capital sources. This shows how much equity will be required for a cash infusion. At each round, investors will make different demands on the firm. It will be based upon perceived reward and risk. Firms should go for a risk analysis report to plug their gaps.