Many companies must complete several fundraising rounds before the initial public offering (IPO) stage. These fundraising rounds allow investors to invest money into a growing company in exchange for equity\ownership. The initial investment – also known as seed funding – is allowed by various rounds, knows as Series A, B, and C. A new valuation is done at the time of each funding round. Various factors, including marketing size, company potential, current revenues, and menagement determine valuation.

What is the funding valuation?

Before any round of funding begins, analysts undertake a valuation of the company in question. Valuations are derived from many factors, including menagment, growth expectation, projections, capital structure, market size and risk.

Investors each have their own method of valuating a business, but many use some of the same factors:

• • Market size: The size of the market the business is in, in dollar value
  • Market share: How much of the market the business makes up, like 0.10% of the overall market
  • Revenue: An estimate of how much the company made and will make. This is market size multiplied by market share.
  • Multiple: Generally an estimate used by the investor to give them an idea of the business’s value, like 10x or 12x the revenue
  • Return: The increase in value, in percent form of how much is invested, based on estimates of growth in market share, market size, and revenue.

What is funding round?

A funding round is a stage at which businesses raise capital. There are different levels of funding rounds: pre-seed funding, seed funding, series A funding, series B funding, series C funding, and sometimes startups proceed with series D and E rounds of funding. The seed funding round, and series A, B and C are considered to be the 4 official stages of funding. All these stages raise progressively more money. However, less than 10% of startups that receive seed funding go on to raise capital in series A funding.

Тhe pre-seed funding

The pre-seed funding stage is generally not included in the number of official funding rounds and the main investors during this stage are the founders themselves, their friends, family, and supporters. Outside investors rarely, if ever, fund a pre-seed stage startup. Only an angel investor may be interested in funding pre-seed round companies. Angel investors are private investors that focus on funding small businesses for equity. An angel round funding amount may be from $100,000 to $250,000. Seed funding Seed funding is the first stage of the official funding process. In this stage, the startup founder and family members may still be among the main investors; however, angel investors and venture capital firms join the equation, too. Series A funding For the next stage, series A funding, the startup must have a business plan to develop a business model directed at a long-term profit. Once a customer base has been generated, a company has to figure out a way to monetize the startup idea in the long run.

The series A

The series A stage usually involves typical investors from venture capital firms such as Sequoia Capital, Google Ventures, and other investors. Angel investors also take part in this stage, but they usually have less impact than in the seed stage. In this type of funding, potential investors look for companies that have a solid strategy for monetizing the business and a proven track record.

The series B

Series B funding The third round mostly goes to companies that are well-established, have a successful business model, and are ready to scale their business to reach the next level. It’s used to expand market reach and meet the raised demands. Meeting the new demands requires more people to work toward the goal. As a result, the additional capital usually goes to developing a stronger team of professionals. The investors interested in series B funding are similar to the ones in the previous round. The only addition is venture capital firms that specialize in startups of later stages.

The series C

Series C funding The companies that are interested in series C funding are usually the ones that are looking to develop new products, conquer new markets, or acquire competitor companies in other regions. Also, it could be used to support the startup for an initial public offering. In this stage, hedge funds, private equity investors, investment banks, and some other investors join the list of existing investors. During the series C round, investors provide additional funding in hopes to get at least double the amount back. One of the reasons for this influx of investors is that, for example, private equity firms are usually interested in already established and successful companies with a proven business model rather than early-stage startups.

Other startup funding types

Other startup funding types include crowdfunding and loans. Crowdfunding mostly refers to the collective fundraising of family, friends, customers, and supporters. This method is primarily done via social media. It’s generally used when the startup struggles to raise money from other institutional investors. Loans mostly refer to bank loans. However, it’s not as attractive to founders because a bank loan must be returned no matter the fate of the startup. For example, if you’re funded by a VC firm, you won’t have the obligation to return the money if the business fails. Instead, you’ll be giving up some of the equity in case of success.

 Startup companies go through 4 main funding rounds: seed, series A, series B, and series C. After that, they can reach an IPO and be listed on the public stock exchange so any investors can contribute to raising capital. Each round comes with progressively more money. In the early stages of a startup, angel investors may fund the company, and in the later stages, venture capital firms, private equity investors, and other financial institutions may join the list of investors.

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