Different Types Of Funding Rounds And What They Mean
When a start-up business is looking to get its operations off the ground, it usually relies on external investment to take it to the next level. Although some start-ups are fortunate enough to grow organically, many others are forced to engage in efforts to raise capital via funding rounds.
A funding round is a window of opportunity for external investors to provide cash upfront to a business in exchange for shared ownership or equity in a said company. You may have seen all kinds of funding rounds mentioned about high-growth companies within your industry, but what does each type of funding round mean?
Below, we explore the most common types of funding rounds and the importance of each funding session to businesses throughout their respective growth journeys.
1. Pre-seed round
The pre-seed funding round is the earliest stage a company can seek external finance. Pre-seed funding is not typically considered an official round of funding, but rather a push to get sufficient funds to get a start-up off the ground. Pre-seed funding could revolve around borrowing funds from family or friends in the first instance. During the developmental stages of a business, it’s highly unlikely to obtain outside investment in exchange for equity in the company.
2. Seed round
The seed round is typically the first formal funding round for a company. It’s often launched at the proof-of-concept stage when a start-up has the basis of a prototype or a minimum viable product to demonstrate the commercial opportunities to prospective investors.
It can be scary when a fledgling company has to launch an investor funding round for the first time. There are so many legal and bureaucratic processes to consider. Luckily, it’s no longer essential to spend vast sums of money on lawyers to go about getting everything ready for your first funding rounds. There are powerful online tools that enable entrepreneurs to handle fundraising and all the subsequent legal matters surrounding it.
3. Series A round
Series A funding is usually reserved for businesses that are considered ‘established’ in their field. They can back that up with evidence of year-on-year revenue and potentially year-on-year revenue growth, as well as other key performance indicators that suggest the business is starting to thrive.
Series A funding rounds are designed to give established businesses the additional wherewithal to enhance their product or service offerings and broaden their client base. On average, Series A funding rounds will weigh in between anything from £1.5 million to £11.5 million.
4. Series B round
Series B funding rounds are, unsurprisingly, the second formal opportunity for venture capitalists and private equity investors to offer funds to growing businesses. Series B rounds are typically viewed as a lower-risk investment opportunity. That’s because companies in need of Series B funding are usually flourishing and valued significantly higher than they were during their Series A funding round.
It’s not uncommon for companies to be valued at more than £30 million prior to Series B funding. Series B rounds are often used to strengthen a range of company departments, from marketing and advertising to customer support and sales.
5. Series C round
A round of Series C funding is when things start to get really serious. These rounds are mostly reserved for businesses readying themselves for rapid growth. They will have already proven themselves to be a success in their respective markets and may even be ready to merge and acquire rival businesses to increase their market share or scale up their capabilities.
After the third round of serious funding, most companies are either ready to push for an IPO or forge ahead organically. However, it’s not uncommon for Series D and even Series E rounds to take place for companies looking to expand on a global scale.