Types Of Startup Fundraising Rounds

Introduction

The stages of financing typically act as checkpoints during a startup’s growth process. Stages may overlap sometimes, and some may be skipped altogether. It is expected that with each fundraising round, the business should be growing and reach certain milestones to show investors that the venture is worth the investment. Early consultation with legal and financial advisors will help set up the best structure for a startup.

Types of Startup Fundraising Rounds

1. Friends and family: There is no particular structure to this. These individuals aren’t necessarily high- net worth individuals, nor do they have the necessary industry experience. These individuals have a personal connection to the founders and are willing to invest their finances in the startup.
   However, founders must determine what kind of round they want to raise from their family and friends. It could take any form, such as a loan, SAFEs, or donation based. It’s also necessary to create a formal contract where all the terms of investment are clearly outlined.

    

2. Pre-seed: This is the period in which the startup gets its operations off the ground. The primary fundraisers in the pre-seed stage are usually the founders (bootstrapping) and a few other investors. The purpose of this round is typically to provide capital to develop the startup’s product.
   They are investing in an idea, a product that has yet to find its market. The capital obtained can also be used to hire a few staff and get office space.

    

3. Seed: This is the first official equity stage. Seed funding helps the startup finance its first steps, such as market research and product development. The investors provide investment in exchange for an equity stake in the startup.
   The seed funding process can take about 3 to 6 months, or even longer for early-stage startups.
   The investment gotten from seed funding is typically to fund the business before it starts making a profit. Investors in this round include friends and family, angel investors, incubators, seed venture capitalists and crowdfunding.

    

4. Seed Extension: This typically arises when the founders didn’t raise enough in the seed round to achieve what they hoped. The founders, therefore, extend the seed round, raising more money on the same terms as the seed round.

    

5. Pre-series A: This is typically defined as a mid-round between Seed and Series A. After raising in the Seed round, some startups may run out of money before reaching their targets for Series A. They, therefore, utilize the Pre-Series A to raise more capital. Many founders use convertible notes for this round rather than equity.

    

6. Pre-series A Extension: This is a funding round typically smaller than Pre-series A, in which the startup raises at the same price as in the previous round. The funding raised could be either from existing or new investors.

    

7. Series A: This involves early-stage startups that need funding for early sales, marketing, and product development requirements. At this stage, the startup typically has some customers or users, a realized product, and a need to expand marketing and sales beyond its current customer base. Angel investors may participate in this round but may likely have less influence as more traditional venture capital firms will become involved in this round.

8. Series B – Z: Series B is the second round, typically done for further expansion and development as well as to acquire talent in the startup, such as IT professionals, sales and advertising experts, and business development roles. A company at this stage typically has a solid customer base and the means to service these customers. This stage aims to develop a competitive advantage in the marketplace. Series B may attract VC firms that are mainly specializing in later-stage financing.

Series C financing is usually undertaken to continue the business model and scale. This may involve expansion into other regions and the acquisition of other companies. At this juncture, investment is usually less risky as there is a history of success, and the company has become a known commodity. By the end of this stage, some companies may continue to Series D–Z if they need more capital, while others may begin to position themselves for an IPO or a private acquisition.

9. IPO: An initial public offering (IPO) is the process of offering shares of a private company to the public in a new stock issuance, allowing the company to raise capital from public investors. It can be seen as an exit strategy for the company’s founders and early investors, realizing the entire profit from their private investment. Private companies with solid fundamentals and proven profitability potential can qualify for an IPO at various valuations.