A Primer on Funding Rounds and their Purpose in Startup Capital
Funding rounds represent an essential process in the growth of any startup company. Obviously, without funding, no startup can make it in the marketplace, so entrepreneurs unfamiliar with the various funding rounds and what they represent should educate themselves quickly, in order to move forward with their "next great idea."
Here's a look at the rounds of funding every startup should address at some point in its planned growth:
Just as the name suggests, seed investment generally involves small amounts of capital, aimed at helping the startup clearly define the new business's directions and goals. This stage of funding, notes investment specialist Michael Whitehouse, is "more speculative than other rounds of investment" and is designed to "establish the startup as a going concern, in many cases going as far as to bring a product to market."
Seed investment enables the startup founder to move from an abstract idea about a new product or service to the design and development of a new product prototype. It also facilitates basic market research, with a focus on competitive analysis, target audience identification, and initial marketing strategy.
Series A Investment
With a prototype in hand, the startup company now looks for funding from a venture capital group to bring the product (or service) to market. Depending on the type of startup, other Series A investment goals might include:
- New market identification and expansion
- Creation of a comprehensive business plan
- Preliminary marketing and advertising
- Building the in-house team
- A resource in the event of a shortfall in capital from seed funding
Series A funding is often significantly more than seed capital (averaging between $3 million and $7 seven million) and is often provided in exchange for ownership of a portion of the fledgling business. The end-result of this funding stage should be working out "the nuts and bolts of moving your product into the actual marketplace."
Series B Investment
At this stage, the new business has been established and begun making a name for itself. Now is the time for significant expansion of manufacturing and production as well as increased sales capabilities. Funding at this stage can range from $7 million to as much as $50 million.
This is the point, says marketing expert Murray Goldstein, where a business "may also be moving toward profitability as it pushes its products and advertisements to the widest possible audience."
Series C Investment
With Series C investment (also called "expansion stage" or "third-stage capital"), the focus is on rapid growth. For some startups, this means looking towards global markets or diversifying their product for application in different platforms. At this stage, most well-funded new businesses are seeing sizable revenues and even a profit.
As the founder and visionary of your startup, it's up to you to generate excitement among investors about what you want to introduce in the marketplace. Be prepared to consistently engage with potential investors, developing a great story about how your idea came to be and a compelling pitch about where you want to take it in the future. You're likely to spark a great deal of initial interest among people, but as Melanie Perkins, founder of the graphic design software company Canva writes, "Far fewer will sign on the dotted line." What you must do, she adds, is "to convince investors that there is a huge problem which needs to be fixed and that you have the best solution with a team to deliver it."