Series A, series B and series C funding rounds refer to the process of growing a start-up business with the help of outside investments. The investors invest their capital into a company in exchange for an equity interest, or partial ownership.
Pre-seed and seed funding stages
The pre-seed stage is usually not counted as a funding round. The most common pre-seed financiers are the founders themselves, as well as their family and friends. Mostly, the start-up is not yet mature enough in this stage to get investor funding in exchange for equity.
The first official money that a start-up raises is called seed funding. Seed start-ups often have great ideas and enthusiastic users, but the founders have not yet developed a consistent business model. The seed funding helps a company take the first steps, such as employing the first team and researching the market for product development. Since investing in a company is riskiest in the seed phase, venture capitalists and banks usually avoid it. The key investors are, again, the founders themselves with their friends and family, but also angel investors – the high-net-worth persons who back up small companies at the early stages, usually looking for equity in exchange for their investment.
Series A funding
Less than half of the seed-funded start-ups go on to raise series A funding. At this stage, investors are looking for companies that have a convincing strategy for turning ideas into real money. Start-ups in the series A round often generate revenue but are still in the pre-profit stage. Key investors here are venture capital companies who specialize in early-stage investments.
Unlike seed financing, series A is a strictly formal funding round. It includes the valuation of the start-up to examine the progress made with seed capital. This demonstrates to investors the management team’s competencies in handling available resources and therefore their profit potential.
Series B funding
Once a start-up can demonstrate scalability – a capability to adapt to increased market demand – they can enter the series B funding round. In this stage, investors are interested in companies that generate stable revenue and show readiness for growing. The success of the investors from previous funding stages becomes increasingly important in attracting new investors.
In series B financing, start-ups can get investments from venture capital companies that specialize in later-stage funding. The later investors commonly pay a higher price for their shares than the investors from the previous funding stages. This means that their returns are lower, but also the risk of losing their investments is lower.
Series C funding
Series C funding stage is for established and successful companies who want to raise capital for developing new products or further expansion. Additionally, start-ups in this round may seek funding to buy other companies for faster growth and/or reducing the competition. As investments into companies with proven business models are less risky, the range of potential investors is broader in series C than in earlier stages. It includes investment banks, private equity companies, and others who aim to secure their own position as business leaders.
The valuation of a start-up, as well as the requirements it needs to meet to attract the investors, change between the rounds. But the main goal of series A, B, and C funding is turning great ideas into profitable businesses. There are also series D and E rounds for different aims, for example, to increase the value of a company before going for an initial public offering (IPO). However, the majority of companies finish raising money with series C.
Synonym(s):
- Series funding
