Venture capital funding typically follows a structured progression of rounds, each with a different level of investment and different expectations for the startup’s growth and development. Here are some of the main types of venture capital funding rounds:
1. Pre-seed funding
Pre-seed funding is typically the first round of funding for a startup, and is used to develop an initial business idea, build a prototype, and conduct market research. Pre-seed funding is usually provided by the founders’ friends and family or by angel investors. The amount of funding usually ranges from a few tens of thousands to a few hundred thousand dollars.
2. Seed funding
Seed funding is the first institutional funding round for a startup and is used to further develop the product or service, build a team, and expand the customer base. Seed funding can come from angel investors, seed-stage venture capital firms, or crowdfunding platforms. The amount of funding usually ranges from a few hundred thousand dollars to a few million dollars.
3. Series A funding
Series A funding is typically used to accelerate growth, further expand the customer base, and improve the product or service. Series A funding is provided by venture capital firms and may be used to support product development, marketing, and hiring. The amount of funding usually ranges from $5 million to $15 million.
Thinking of investing in a Seed or Series A round? If you’re bringing together multiple investors for a startup investment, an SPV may provide a structure for coordinating their participation. Talk to our team about structuring your investment deal.
4. Series B funding
Series B funding is used to scale the business and expand into new markets. Series B funding is provided by later-stage venture capital firms and may be used to support product development, marketing, hiring, and acquisitions. The amount of funding usually ranges from $10 million to $30 million.
5. Series C funding (and beyond)
Series C funding and beyond are used to further scale the business, expand globally, or prepare for an IPO. These rounds may also involve private equity firms or other institutional investors. The amount of funding usually ranges from $30 million to $50 million.
As well as progressively larger investment amounts, each funding round typically involves a higher valuation for the company and increased expectations for growth and performance. As the company progresses through each round, it becomes increasingly attractive to larger and more established investors, such as private equity firms and strategic buyers.
That may seem like a clear progression through funding rounds, but it’s subject to one major qualification: it all depends! Determining which funding round a startup is raising, or should raise, can be more of an art than a science.
It depends on the amount being raised, the startup’s age, the startup’s location and industry, the startup’s progress, the type of investors, the market conditions, or a combination of these and any other factors.
It can be helpful to label a funding round but, equally, it’s important to understand the nuances of a specific startup’s funding round. It may, for example, be called the “Series A Funding” but on further inspection it could actually be the “Seed Funding”. This distinction could have major implications for both the startup and its investors.
Planning your next startup investment?
Understanding the funding round is only part of the decision. Investors also need to consider the deal structure, the other participants and the requirements involved in completing the investment.
If you’re preparing to invest in a startup or bring together other investors, book a call with one of our experts, who will be more than happy to discuss your proposed transaction and explore whether an SPV could suit your needs.