You’ve probably seen lots of articles about X company raising Y amount of money in some kind of funding round or another. But what do the different types of funding rounds mean?
Well, a funding round is anytime money is raised from one or more investors for a business. They’re given a letter, such as A Round, B Round, C Round, etc. because each round follows another. The letter identifies which number of rounds they’re on. For example, ‘C Round’ would mean the third round of funding a company has had. The type of funding round will also depend on the type of shares are being offered, such as ordinary or preferred shares.
We take a closer look at the types of rounds and what they mean but note that thanks to equity crowdfunding, anyone can invest alongside angels and venture capitalists (VCs) at each stage.
The seed round usually happens when the company is at the initial idea stage, or once the founder has a prototype/proof of concept, as well as some kind of sign that there’s a demand for what could be offered.
An angel round often occurs when a company is only just launching, if not before. Chances are that it will need an investment to support the business because it probably won’t be generating a big enough cash flow to cover all the day-to-day running costs.
Sometimes a seed round and an angel round aren’t two separate rounds, they can be a hybrid of the two.
Despite the name, both seed and angel investment rounds usually include a large proportion of funding from friends and family. It can also include money from angel investors who are focused on early-stage companies.
Typically, investors will put in smaller amounts in exchange for equity, because the company will have little or no track record and the risk is higher than for a more established company.
Series A Round
As with the previous round, investing at this stage is usually regarded as high risk because the company will probably still be at the startup stage with a lot to prove.
After a company has issued share options (usually to founders and employees), it will often offer a Series A round of shares in return for funding.
Angels may be interested, but venture capitalists may also invest. Angels usually invest their own money and are often considered high net worth individuals. VCs and other institutional investors tend to invest other peoples’ money, so, they usually only invest in companies with a proven track record to reduce their risk.
Series B Round
As you’ve probably guessed, a series B round is the second round of funding by private equity investors and VCs. By this stage, the company will probably have a higher valuation than before. The risk will be lower than before as the business will have a track record – so the cost to invest will be higher.
Investors will expect to see signs of growth at this stage in:
- Product/service success
Series C Round
Typically, a Series C round is required when a company is ready to go for rapid growth. The company will usually:
- Have become a proven success in its market
- Wants to make acquisitions of competitors
- Increase market share
- Scale up or develop new products or services
By understanding the differences between each type of funding rounds, it becomes easy to see what a round means for the company that’s raising – and how far a company is progressing along the road to becoming an IPO.