Posted by Lately, I’ve been excited to read about two tech startups led by Black women closing ~$4M in seed funding each: Klasha, founded by Jess Anuna, and Gander, founded by Kimiloluwa Fafowora. I love to see women – especially Black women – leading in tech!
But even though I worked in the tech world for many years, I never really understood what each funding round was about or what it meant for the future of the startup.
So I did a little research and put together this basic primer on the different startup funding rounds to help understand and assess this exciting landscape:
Pre-Seed Funding
“Pre-seed funding is when entrepreneurs still need to prove a market need for their idea.”
Crunchbase
- Some people don’t even count this as a funding stage because it’s so early in the process.
- You have no customers. You have no revenue.
- What you have at this point is an idea and you don’t know if there’s even a market for it – do people really want or need this?
- The funding at this stage usually comes from yourself, your friends, and your family so you can begin building and testing out your idea. It’s usually not for equity at this point, and comes instead as loans.
Seed Funding (Early Stage)
“Seed funding is usually between $500,000 and $2 million”
startups.com
- This is the first official equity funding stage.
- By now you’ve proven there is a market for your idea.
- Your product exists, you have a customer base, and you’re seeing rapid growth.
- Angel Investors are common at this stage. Founders, friends, family may also still contribute, along with crowd-funding, accelerators, incubators, and some venture capital companies.
“…Seek funding only when you already have proven rapid growth.”
Crunchbase
“Investors only want to provide money for scaling a proven business model”
Entrepreneur
Series A Funding
“Usually $2 million to $15 million”
startups.com
- It’s not easy for seed-funded companies to “graduate” to Series A funding.
- By now your business has a track record – a minimum viable product (MVP), an established customer base, and consistent revenue, etc.
- At this stage it’s more than an idea – it’s an idea with a strategy to monetize and generate profits.
- The investments are larger to provide enough “runway” for the startup to operate for a couple of years – develop the product(s), team, and begin to execute its strategy.
- This is usually where the first traditional venture capital firms get involved. (Crowdfunding is also becoming more common).
“Less than 10% of companies that raise a seed round are successful in raising a Series A investment.”
fundz.net
In 2021, there were ~880 Series A deals in the U.S. vs. ~650 in 2020.
(source: fundz.net)
Series B Funding
“Usually between $7 million and $10 million.”
startups.com
- Companies at this funding round are well-established and need help expanding.
- Growth after a Series B round is about gaining more customers and growing the team to meet the demand of a growing customer base (sales, advertising, tech, etc.)
- The same venture capital firms from Series A usually participate plus some new ones who focus on “late stage” investing.
“Series B funding is the most challenging round for a startup company”
(source: fundz.net)
Series C Funding
“Startups typically raise an average of $26 million.”
startups.com
- Series C is typically the final round of funding, known as “later-stage” investments (although D and E exist).
- The company is now fully successful and looking to IPO, acquire another business, be acquired, develop new products, and/or expand into international markets.
- Venture capital firms focused on late-stage startups, private equity firms, banks, and hedge funds get involved at this point.
“Once a company has built a product that’s become a darling in the market, that’s when the Private Equity and Investment Bankers show up,” Schroter says. “These folks aren’t looking for a lot of risk – they let the angel investors and venture capital firms deal with that. They are looking to put massive sums of money into companies that are already winning to allow them to secure their leadership position.”
startups.com