A Beginner’s Guide to Venture Capital Funding for New Businesses
By Rae Steinbach, Date published: 2020-03-16
Are you thinking about starting your own business? If so, you’ll need funding to turn your idea into a successful startup. Of course, pursuing funding can seem intimidating if you’re a first-time entrepreneur. With everything from affordable loan options for women to merchant cash advances available in terms of financing options, it can be tough to both understand the differences and know what’s right for your business. In this article, we’re focusing on getting rounds of funding from investors. You’ve likely heard terms such as “Series A” or “Series B” and wondered what they refer to.
Don’t worry. While the terminology may not be familiar to you right now, these are actually fairly simple concepts. The following descriptions will help you better understand them:
Series A Financing
As the name implies, Series A is among the first major rounds of funding you would pursue when approaching investors. Keep in mind, however, that Series A funding may not technically represent the first sum of money you use to grow your business.
You may go through a “Pre-Seed” phase during which you and your co-founders pool your own money and resources to get started. Additionally, this might be followed by the “Seed Funding” round. During this round, you may pursue a relatively small amount of initial funding from friends, family members, and investors. This is the first stage in which you would offer equity in your company to anyone investing in it.
The Series A round begins when your business is generating enough consistent revenue (or is otherwise performing well in other areas) that you can justify pursuing larger sums from investors in order to grow your business further. For example, perhaps you’ve launched a basic iteration of an app idea that’s performed well during a test run in a relatively small market. You might then need additional funding to develop a stronger version of the app. To acquire it, you would thoroughly develop your strategy, presenting it to potential investors.
During the Series A round, investors who do choose to provide funding will usually invest between $2 million to $15 million, though these sums can vary depending on a range of factors.
Series B Financing
The strategy you developed during the Series A round will ideally yield results when you use the funding you’ve secured to implement it. When this happens, you’ll likely need more funding to ensure your business continues to grow at a consistent rate.
To return to the example above, after creating a stronger version of your app and growing your user base, you would probably need to fund marketing campaigns to help it reach even more users.
Once again, you would pursue this funding by presenting your strategy to investors and citing your current successes. During the Series B round, investors usually offer sums ranging between $7 million and $10 million.
Series C Financing
By the time you reach the Series C round, your business will already be a proven success. You might now be ready to develop new products, acquire businesses offering products similar to yours, or continue expanding. Luckily, if you’ve reached this stage, convincing investors to provide funding will usually be easier.
Those who invest in your company during the Series C round plan to offer large sums with the expectation of a large payoff, knowing that investing in a successful company is much less risky than investing in an unproven idea. On average, a startup will raise $26 million during the Series C round.
It’s common for startups to stop pursuing additional funding after Series C. That said, it’s worth noting that some companies proceed to the Series E and Series F rounds if necessary.
Hopefully you now appreciate that these concepts are not as difficult to understand as you might have initially assumed. Of course, what’s most important right now is making sure you have a strong business idea and strategy. Understanding the terminology will simply help you develop your strategy more clearly. That’s key to your success.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.