An investment round is a stage in which a company raises funds from investors to grow its business. Companies, especially startups, go through multiple investment rounds as they scale. Each round has a specific purpose, type of investors, and valuation considerations.
Types of Investment Rounds
Pre-Seed Round
- Purpose: To validate an idea, build a prototype.
- Investors: Founders, friends, family, angel investors.
- Funding Amount: Small, often under $500K.
Seed Round
- Purpose: To launch the product, conduct market research.
- Investors: Angel investors, early-stage venture capital (VC) firms.
- Funding Amount: $500K – $2M (varies).
Series A
- Purpose: To scale operations, acquire customers.
- Investors: Venture capital firms.
- Funding Amount: $2M – $15M+.
- Valuation: $10M – $30M+.
Series B
- Purpose: To expand market reach, optimize business model.
- Investors: Larger VC firms, private equity firms.
- Funding Amount: $15M – $50M+.
- Valuation: $30M – $100M+.
Series C and Beyond
- Purpose: Rapid scaling, entering new markets, acquisitions.
- Investors: Late-stage VCs, hedge funds, investment banks.
- Funding Amount: $50M – $100M+.
- Valuation: $100M+.
Initial Public Offering (IPO)
- Purpose: To go public, raise capital from public investors.
- Investors: Institutional investors, retail investors.
- Funding Amount: Varies (often in billions).
Self-funding
An entrepreneur should ascertain how much amount he/she can contribute from his/her own pockets. Assess all of your investments and savings kept in multiple accounts, and approach your friends and family. This stage involves fewer complexities and documentation, and even your friends and family maybe ready to lend at a cheaper rate. Self-funding or bootstrapping is apt if your startup requires a little investment earlier.
Seed-capital
Seed-capital is an investment made at the preliminary stage of the startup. This helps the business in identifying and creating a perfect direction for their startup. Funds raised at this stage are used for knowing the customers’ demands, preferences, and tastes, and then formulating a product or service accordingly. Most of the budding entrepreneurs raise this capital from friends, mentors, and family, while some take up loans in exchange for common stock.
Venture
When the company’s final products or services reach the market, venture capital funding comes into the picture. Regardless of the products’ profitability, every business considers using this stage that further involves multiple rounds of funding:
Series A
Series A investment, being the very first round of funding, doesn’t ask for external funding. At this stage, startups have formulated a specific plan for their product or service. It is mostly used for marketing and improving your brand credibility, tapping new markets and helping the business grow.
Series B
When a business relies on Series B investment, it portrays that the product is marketed right, and the customers are actually buying the product or service, as decided earlier. Such funding helps a business in paying salaries, hiring more staff, improving the infrastructure and establishing it as a global player.
Series C
A startup can receive as many rounds of investment as possible, there is no certain restriction on it. However, during Series C investment, the owners, as well as the investors, are pretty cautious about funding this round. The more the investment rounds, the more release of the business’ equity.
IPO (Initial Public Offering)
When a startup decides to raise funds from the public including institutional investors as well as individuals, by selling its shares, it is known as an IPO (Initial Public Offering). IPO is commonly related to ‘going public’ as the general public now wants to invest in your company by buying shares.
It’s not an obligation for the founders to disclose their financial statements before public if they go for an IPO. But the company must submit information related to financial statements, the purpose of raising funds, etc. to the SEBI. IPO basically helps you grow and diversify in areas of choice. For taking your startup to the next level, you should know which stage of funding you want to go for, for what purpose. Such decisions made at the right time can be boon for your business.
What Is Series A, B, and C Funding?
Series A, B, and C are funding rounds that generally follow “seed funding” and “angel investing,” providing outside investors the opportunity to invest cash in a growing company in exchange for equity or partial ownership. Series A, B, and C funding rounds are each separate fund-raising occurrences. The terms come from the series of stock being issued by the capital-seeking company.
How Series A, B, and C Funding Rounds Work
Before exploring how a round of funding works, it’s necessary to identify the different participants. First, there are the individuals hoping to gain funding for a new business. Businesses tend to advance through funding rounds; it’s common for a company to begin with a seed round and continue with A, B, and C funding rounds.
FAQs
How an Investment Round Works?
- Preparation: The company evaluates its needs and prepares financials.
- Pitching: Founders pitch to investors.
- Due Diligence: Investors assess the company’s potential.
- Valuation: The company’s worth is determined.
- Funding Agreement: Terms are negotiated, shares are issued.
How Many Series of Funding Before IPO?
The typical number of seed rounds a company goes through before completing an initial public offering (IPO) is three. However, no set number of rounds must be used to raise funds.
