Everything you need to understand about Series A, B, C, D and E funding for startups
When it comes to startup funding, Series A, B, C, D and E indicate distinct financing rounds through which startups raise investment during different stages of their development.
The most daunting challenge facing entrepreneurs is that of financing. Early stage funding is often a course-charter and crucial to the survival of startups—they determine the size and scope of the startups in the future.
The first stage of startup funding is the pre-seed round. This money usually comes from the founders of the company, and close family and relatives who believe in the startup idea. At this stage, investors do not invest in exchange for equity, but rather, they gather funds to get the company off the ground, allowing them some runway to develop the product.
In the Seed Funding stage, the startup officially raises investment to help grow the business. Seed funding can be provided by founders, Incubators, relatives, and Venture Capital (VC) companies that invest in early stage startups. Angel Investors typically participate at the seed funding stage. They tend to invest in riskier ventures, and expect equity in exchange for their investment.
Series A Funding
For Series A funding, startups need to have a Minimum Viable Product (MVP) and a business model idea. They need to have a track record with consistent revenue, a user base, or other Key Performance Indicators (KPIs). It is important for startups to have a clear monetization policy to show investors how they can profit by investing in the company.
Startups usually raise investment by allotting preferred stock to investors, and ‘Series A’ refers to the class of preferred stock sold. The value of the company is determined based on proof of concept, progress made with seed capital, quality and experience of the management or executive team, market size, and risks involved.
Startups need to generate revenue in order to be eligible for Series A funding. They use Series A financing to expand their business or customer base, increase market research, or as working capital.
This funding round involves high risks for investors since they are investing in companies that are not yet profitable.
Series B Funding
A startup conducts Series B round of funding when it faces a roadblock in expansion, a struggle for market share, or encounters competition. The startups’ products or services are already available in the market at this stage.
For this round, the company value is determined on the basis of revenue forecasts, assets like intellectual property, and the performance of the company irelevant to industry competitors. This investment helps startups break even and achieve profit.
Compared to Series A funding, investing at this stage involves less risk and the funding amount is also usually bigger.
Series C Funding
At this stage, the companies have already proved themselves to be successful enterprises, and need capital to expand to foreign markets.
Series C financing is usually used to expand to new markets, develop new business, or acquire other enterprises. With the infusion of funds from Series C funding, startups generally become appealing for acquisition or for Initial Public Offering (IPO)–also known as ‘exit.’
The funding amount in Series C round is bigger than Series A and B. Series C funding is usually received from hedge funds, private equity firms and large financial institutions like investment banks.
Series D Funding
Startups opt to raise investments through Series D funding when they discover some untapped potential to achieve before going public, or they failed to hit the targets they had set in the previous round of financing, or strategically prefer to stay private for longer.
Companies that choose to raise funding through Series E, F, or G are usually trying to increase their valuation before going public, or want to remain private for longer.