A look at what the first two funding rounds entail, and what you require to ace them.
The recipe for startup success includes a great idea, an equally great team and enough capital to bring it all together. You may start with funds from your family and friends. But as your company grows, you will require more financing. Enter funding. In funding rounds, investors get the opportunity to invest in growing companies in return for part ownership of the company or shares.
Here, we break down the first two funding rounds—seed funding and Series A funding.
Seed funding
Between 2016 and 2020, over 20,000 American startups raised money through seed funding. This stage has become so popular that the average seed deal has increased from US$1.7 million to US$4.6 million in a decade. In October 2021, one of the oldest venture capital firms, Greylock, announced that they will dedicate US$500 million to seed funding. They noted, “The ‘decision tree’ of a company has the most range at the beginning, and we want to be there as a partner to founders from the foundation.”
So, what is seed funding?
This is the stage where your startup gets its foundational money. It’s the first official funding stage. Often, many companies get enough capital from this stage and don’t need to try other stages. This funding round typically sees 15 or fewer investors.
What is the purpose of a seed round?
The funding from this round typically goes toward market research, product development and infrastructure costs. It focuses on fine-tuning your business idea.
What are the types of seed funding?
- Crowdfunding: This is where anyone in the world can seed fund your startup. For instance, virtual reality headset company Oculus launched on Kickstarter, a funding platform. Oculus aimed to raise $250,000. Within four hours of launching, they reached their target amount. Eventually, Oculus raised US$2.4 million.
- Corporate seed funding: It’s when tech giants, like Apple and Microsoft, invest in startups.
- Incubators: They provide the support and management assistance that a startup requires. In October 2021, the Indian Institute of Management-Ahmedabad’s incubator, Center for Innovation, Incubation and Entrepreneurship, seed-funded Mestastop, a Bengaluru-based biotech startup, with over US$250k.
- Accelerators: These are group-based programs that help your startup scale up and connect with industry professionals, thus boosting your overall potential.
- Angel investors: Angel investors have a larger risk appetite and are among the most prominent seed funders. They provide funds in return for part ownership or company shares.
Our top tips to acquire seed funding
- Research relevant investors
- Get your documents, such as your term sheet, shareholder agreements and the like, in order
- Prepare a pitch they can’t say no to
Series A funding
Between 2010 and 2017, Series A funding increased by US$7 million. Every day, startups raise significant amounts in Series A funding and, typically, don’t feel the need to go for other rounds.
What is Series A funding?
Many startups skip seed funding and go straight to the Series A funding round, as the latter is more lucrative. Series A is one of the capital-raising stages. For many startups, it is the first stage where they get a considerable amount of financing in return for the company’s shares. Series A funding is difficult to attain as it involves a bigger amount of money than seed funding. In 2020, the average series A funding amount was US$15.6 million.
What is the purpose of a Series A round?
In November 2021, Multiplier Brand Solutions Pvt Ltd, a professional employment organization (PEO) platform raised US$13.2 million in a Series A funding round. They will use these funds to boost their full-stack platform and expand globally. They will also scale up their business. In a Series A funding round, companies usually acquire money to help them scale their business significantly.
Our top tips to acquire Series A funding
- Have a long-term profit plan to impress investors
- Acquire a significant amount of customers and a reliable team and management system
- Hire a good lawyer to handle the lengthy paperwork involved
- Show that you are the leader of your business category
- Build relationships with Series A investors in advance
Besides seed and Series A funding, there are other rounds too, including series B, C and D funding. To know more about them, check out this article.
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