Fundraising is complicated. We’ve Been There and We’re Here to Help You Through It.
The early days of a company can be utopian: a founder and possibly a co-founder batting ideas back and forth in an environment of creative bliss. Even the term we use for this creative space — the incubator — calls to mind the warmth, coziness, and protection of a womb.
There comes a point, though, when a company needs to move from big ideas toward an actual product.To do this, you need to think about generating money. But how do you get money before there is even a product to sell? Fundraising (but not the charity kind).
When startups raise money, they do it with rounds of investments. The first is called the seed round and, if the company starts to find traction, there will be a Series A-B-C, all the way until they either go public (IPO), sell, or run out of steam. In each round, the company receives money from venture funds. Different funds specialize in different points in a companies growth, and matching with the right funds can be crucial to your success as they often provide more than just capital infusions.
You can break a startup’s funding rounds into the following stages:
- Seed Round: This is usually a small amount of money given to a company to give it the bare bones resources it needs to produce its initial product, or minimum viable product (MVP). Normally, the startup will have a well-formed concept and a plan for bringing it to market, but they won’t have a working prototype just yet. Seed money gives the company enough runway to move from this early conceptual phase toward a product.
- Series A: When a company has a prototype or even a basic version of their product on the market, they can seek funding from a venture capital group to work toward building momentum. The Series A funding will be larger than the Seed Round (historically somewhere between three and seven million dollars). And, as is with all the funding rounds, with the Series A you will be giving up equity (aka. A percentage of your ownership in the company) for the incoming cash investment. Startups often use Series A funding to fine tune their business model and to work out the nuts and bolts of moving their product to market.
- Series B: By the time they’ve reached a Series B round, a startup has a product and a proven business model, but they need the burst of momentum (also known as capital) to reach more people more quickly. This represents a significant increase in the funding, from $7 million to upwards of $50 million.
- Series C: This is all about fast growth. In Series C funding, companies might move the work they’ve been doing in Series B toward international markets or focus on diversifying their product for multiple different platforms.
Remember though, not all companies go through all of these stages. It’s really about what is right for the product and for the market!
How long does fundraising go on for?
A startup company can fund rounds indefinitely if they want to and there are investors willing to give them money, but that’s not really a practical strategy. In each round of funding, you offer a piece of your company to your investors. This piece of your company pie is the price you pay for their investment. That’s not such a big deal in the first few rounds since the company’s valuation grows as people invest (at least in theory), but after a couple of rounds of funding, the slices get smaller and smaller and, eventually, you don’t have much left to offer an investor. Remember too that the pie is your ownership, so each time you give a piece away you are taking it from yourself. At a certain point, it’s important for a company to either sell (like Instagram did) or to start trading publicly (like Facebook).
The Instagram and Facebook Example
Instagram is a good example of how this form of growth works. Instagram started with a $500,000 seed round. Two years later, they raised a $7 million series A. After that, there was a $50 million series B. Between each of these, they proved had to create a product, prove that it had reach, and figure out how to monetize it. Eventually, they were purchased by Facebook for nearly $1 billion. When the deal closed, the investors who had pieces of the Instagram pie made back their investment and then some, as did the founders.
Of course, this is a super successful example. Most startups don’t sell for $1 billion and many don’t even make it through a Seed Round, but knowing how things work is the first step towards playing the startup game successfully.
- Startups raise money in rounds of investment with investors/venture funds that focus on specific growth points.
- Most of the time, startups begin with seed money and a short runway. If you’re starting with than a million dollars, you’ve skipped straight to series A.
- It’s important to plan for growth. After too many rounds of funding, you won’t have much left to offer investors.