There are reams of articles about businesses looking to raise money in different types of funding rounds. Here we look at the different types of funding rounds out there and explain a little about each one?
Definition: a funding round is the occasion in which money is raised for a business from one or more investors. These rounds are often referred to as series A, B, or C simply because one round precedes the other; so, series B will be the second round of funding, and so on. The type of funding round will also depend on the type of shares being offered, such as ordinary or preferred shares.
Here we take a closer look at the types of rounds and what they mean but note that, thanks to equity crowdfunding, now anyone can invest alongside angels and venture capitalists (VCs) at each stage.
The seed round often happens when the company is at the initial idea stage, or once the founder has a prototype or proof of concept, as well as an indication, backed up by research, that there’s a demand for what the company is offering.
An angel round usually occurs when a company is only just launching. Chances are that it will need investment to support the business because it probably won’t be generating a big enough cash flow to cover the day-to-day running costs.
Sometimes a seed round and an angel round aren’t two separate rounds, they can be a hybrid of the two.
Despite the name, both seed and angel investment rounds usually include a large proportion of funding from friends and family. It can also include money from angel investors who are focused on early-stage companies.
Typically, investors will put in smaller amounts in exchange for equity, because the company will have little or no track record – and the risk is seen as much higher than for a more established company.
Series A Round
As with the previous round, investing at this stage is usually regarded as high risk because the company will probably still be at the startup stage with a lot to prove.
After a company has issued share options (usually to founders and employees), it will often offer a Series A round of shares in return for funding.
Angels may be interested, but venture capitalists may also invest. Angels usually invest their own money and are often considered high net worth individuals. VCs and other institutional investors tend to invest other peoples’ money, so, they usually only invest in companies with a proven track record to reduce their risk.
Series B Round
A series B round is the second round of funding by private equity investors and VCs. By this stage, the company will probably have a higher valuation than before. The risk will be lower than before as the business will have a track record – so the cost to invest will be higher. Investors will expect to see signs of growth at this stage in revenue, users and product/service success.
Series C Round
Typically, a Series C round is required when a company is ready to go for rapid growth. The company will usually:
- Have become a proven success in its market
- Wants to make acquisitions of competitors
- Increase market share
- Scale up or develop new products or services
By understanding the differences between each type of funding round, it becomes easy to see what a round means for the company that’s raising – and how far a company is progressing along the road to becoming a listed company on a stock exchange.