Series Funding: How It Works?

Created by Yash Rathod

As it is rightly said by, Robert A. Rice Jr that

‘An entrepreneur without funding is a musician without an instrument’

Despite the fact that the vast majority of businesses are built on a unique idea or product, the vast majority fail to get off the ground. What is the distinction between added extras and rejection? Finding adequate money is a challenge for many entrepreneurs, which generally begins with seed funding.

Here, we answer frequently asked questions concerning seed investment for entrepreneurs.

What is Series of Funding? – For Startups

A series of funding refers to multiple rounds of investment into a company, each round being a part of a larger sequence of fundraising. It is a type of financing provided to early-stage startups or entrepreneurs to help them establish a new business or launch a new product. It typically progresses from an early seed round to later rounds such as Series A, B, C, and beyond. Each round may have different investors, valuation, ownership, and voting rights, as well as funding goals, milestones, and expectations for growth. The goal of a series of funding is to provide capital for the company to grow, develop, and scale its operations and reach its business objectives.

Pre-Seed Funding

Applicable = Early stage of Startup Financing
Ticket Size Range = $10,000 – $250,000 (INR 8 Lakhs to 2 Crores)
Required Traction = Patented Technology, Minimum Viable Product (MVP), Prototype Stage, Clear Market opportunity.
Funded by = Families, Friends, Incubators* or Accelerators** & Government Grants

Purpose = Market research, Prototype development, Early Interest, Revenue Modelling and Team formation.

*Incubator-They are the one that focus on early-stage startups that do not have a business model in place. They help nurture a startup by developing its strong idea into a viable product and are commonly referred to as a school for startups. Incubators typically work on a fee-basis as opposed to taking an equity stake in the startup.

**Accelerator- A startup accelerator, sometimes referred to as a seed accelerator, is a business program that supports early-stage, growth-driven companies through education, mentorship and financing.

Things to know in Pre-Seed Funding

Early stage of Startup Financing.
It is so early that many people exclude this from the cycle of equity funding.
Usually provided to founders to validate their ideas and build a minimum viable product (MVP) .

Typically used to cover the initial costs of starting a business, such as market research, prototype development, and team formation.
Pre-seed funding is usually small in size and is intended to give startups the resources they need to reach the next stage of funding, such as seed funding.
Since it is relatively new part of the startup cycle, it is difficult to say how much money can be raised.

Fun Fact – The first independent startup accelerator was Y Combinator, which was originally started in Cambridge, Massachusetts but then moved to Silicon Valley.

Seed Funding

Applicable = When a business idea is ready, and the business model, logistics, set up of the office etc are all under process.
Ticket Size Range = $20,000 – $2 Million (INR 16 Lakhs to 164.3 Million)
Required Traction = A high quality team, Product-Market mix, and some amount of customer adoption

Funded by = Angel Investors, High Net worth Individuals (HNI’s), Government Grants & Institutional Investors
Purpose = Market research, Prototype development, Early Interest, Revenue Modelling and Team formation.

Things to know in Seed Funding

Initial stage of funding-The first official money that a business venture or enterprise raises.

Helps a company to finance its first steps-Market research and Product Development.
The goal of seed funding is to provide startups with enough capital to get through the initial stages of development and reach the next stage of financing, such as Series A funding.
In return for the investment, seed funders may receive equity in the company or the option to purchase equity at a later stage.
Valuations of companies- Between $3 million and $6 million.

Series A Round

Applicable = Companies who have completed Seed Funding
Ticket Size Range = $2 million to $15 million (INR 164 million to 1232 million)
Due to high tech industry valuations and increase in unicorns-The median funding has increased to $10 million
Required Traction = Due diligence and Valuation process, at least minimum scale of Scalability & Unit Economics, Big Vision, Latent Demand for the product

Funded by = Traditional Venture Capital Firms
Purpose = Launching a product, generating revenue, or achieving profitability, which will increase the company’s valuation and help it attract additional investment in future rounds.

Things to know in Series A Funding

In Series A funding, investors are not just looking for great ideas. Rather, they are looking for companies with great ideas as well as a strong strategy for turning that idea into a successful, money-making business.
The goal is to help startups reach key milestones, such as launching a product, generating revenue, or achieving profitability, which will increase the company’s valuation and help it attract additional investment in future rounds.
Valuations of companies can go up to $24 million.
Angel investors also invest at this stage, but they tend to have much less influence in this funding round than they did in the seed funding stage.
Fewer than 10% of seed-funded companies will go on to raise Series A funds as well.
A single investor may serve as an “anchor.”

Series B Round

Applicable = Generally takes place when the company has accomplished certain milestones in developing its business and is past the initial startup stage.
Ticket Size Range = $7 million and $25 million (INR 575 million to 2054 million)
Required Traction = Good position in the industry, A large amount of sales revenue.

Funded by = Private Equity Investors, Family Offices, Strategic Investors and Venture Capitalists.
Purpose = Launching a product, generating revenue, or achieving profitability, which will increase the company’s valuation and help it attract additional investment in future rounds.

Things to know in Series B Funding

“Series B” refers to the class of preferred stock sold.

Taking businesses to the next level, past the development stage-To expand market reach.
The difference with Series B is the addition of a new wave of other venture capital firms that specialize in later-stage investing.
Valuation of companies- Between around $30 million and $60 million.

Series C Round

Applicable = Established Companies looking for expansion in the industry.
Ticket Size Range = $30 million and $100 million (INR 2465 million to 8217 million)
Required Traction = Established Market and customer base and have achieved the Stabilization strategy
Funded by = Private Equity Investors, Venture Capitalists & Banks.
Purpose = New products, expand into new markets, or even to acquire other companies.

Things to know in Series C Funding

The fourth stage of startup financing, and typically the last stage of venture capital financing.
Businesses that raise a Series C funding are already quite successful.
Additional funding in order to introduce- Investors involved- Hedge funds, Investment banks, Private Equity firms and larger secondary market group.

Most commonly, a company will end its external equity funding with Series C. However, some companies can go on to Series D and even Series E rounds of funding as well.
Depending on the business strategy, a Series C round may be the end of the road in terms of venture capital financing. At this point, the company is likely headed in a strong direction and owns a large % of an addressable market. However, some companies go on to raise their Series D, Series E, Series F, and even Series G.
The average Series C round results in $50 million in funding.

Series D Round

Can also be referred to as ‘Down Round’ in case the company has failed to meet the outlined targets after Series C and is raising capital at a lower valuation than it did in the last round.

New potential for growth prior to launching an IPO, in order to improve their worth prior to going public, more businesses are raising Series D rounds (or even beyond)

Series E Round

Companies at this stage can be raising capital for the factors mentioned in the Series D round.

Conclusion

Recognizing the distinctions between these stages of capital raising can assist you in interpreting startup news and evaluating entrepreneurial opportunities. Startup demographics vary depending on the case study, but they all have varied risk profiles and maturity levels at each funding step. However, seed investors, as well as Series A, B, and C investors, all contribute to the achievement of ideas. Series financing allows investors to provide entrepreneurs with the capital they need to achieve their objectives with the possibility of reaping out collectively later in an IPO.