Pre-seed, Seed, Series A, B, C: How startup fundraising works

…running a startup is also the way I think about raising money — it’s a process of peeling away layers of risk as you go.

Marc Andressen

Raising capital is one of the most challenging obstacles a founder must overcome when launching a startup. If raising a round, you may be intimidated by the opaque world of venture capital. It can be highly stressful raising money while managing a company. But learning to maneuver across the often rocky terrain of startup financing is an essential first step to securing the capital your startup needs.

Unfortunately, in addition to being complicated, fundraising can also be an arduous and time-consuming process. You need to devise a pitch deck and network heavily in order to secure meetings with investors. A fundraising round can take at least 3 - 4 months to complete, so be prepared for a lengthy process, especially if you are new to the startup scene.

Although outside funding isn’t required, many startups choose to raise it to accelerate growth. Many of the largest tech companies in the world were supported by venture funding from their early days. Uber, Airbnb, Facebook all became unicorns thanks to the support of venture capitalists and angel investors who were willing to take a gamble on them. Funding helped them expand their products’ reach to millions of end users and enabled them to mature into the tech giants we know today.

All these great tech companies were once startups maneuvering through the world of venture capital. Their founders needed to learn to negotiate term sheets and decide how much of their company to give away at each round. Becoming experts in startup fundraising helped them scale their products to millions of end-users, all while retaining a fair share of their companies. This guide will help you to similarly become proficient in navigating the distinct stages of venture capital.

Pre-seed and “friends and family” funding rounds

Early-stage fundraising often starts out with friends and family. These are the people who you are willing to assume the highest amount of risk on your endeavor because of their personal connection. Investors in the family and friends round generally invest anywhere from $5000 to $100,000 of their own personal money at this stage.

While risky, family and friends can be highly rewarded for the risk they take. Jeff Bezos’ parents invested $300,000 into their son’s startup for a 6% stake. They've netted billions of dollars since Amazon went public. The money from family and friends is usually enough for a founder to create a minimum viable product and attract outside investors.

Pre-seed rounds are similarly early in a startup’s financing lifecycle. While small, pre-seed rounds are typically larger than the family and friends round. These rounds are generally less than $750,000. The pre-seed round lets a founder fine-tune their company’s business model, hire a startup’s first employees, find product-market fit, and start generating revenue.

Seed Round

A seed round provides a startup with the capital needed to let it take its first few steps. A seed round should support a business until it can generate enough cash flow of its own. Seed funding allows a startup to hire to continue with other initial steps like product development, marketing, and research and development costs. Major investors in seed rounds include angel investors, equity crowdfunding platforms, and early-stage venture funds. Many of the funding rounds on Republic are considered seed rounds.

Seed rounds vary widely, but are often between $500 and $8M.  Valuations vary greatly, but are typically between $2 and $26 million.  The size of seed rounds has increased over recent years, according to TechCurnch.  In 2010 the average seed round was $1.3 million.  IT had grown to over $7.5 million by 2018!  Startups that raise a seed round must show significant progress to move on to a Series A round.

Series A funding

A Series A funding round is a significant milestone round of startup funding. By the time a startup raises this round, it should have generated substantial traction and reached several milestones to signal growth, including revenue, users, views and other key indicators. Some prominent venture capital firms who invest in Series A rounds include:

• Google Ventures
• Kleiner Perkins
• Benchmark
• Threshold V.C
• Union Square Ventures

Series A rounds tend to be multitudes larger than a seed round, at between $2 million and $10 million. According to Fundz, in 2020 Series A funding rounds had a median valuation of $23 million. Series A rounds are usually led by one investor known as the lead investor. When you bring on institutional investors, you add new owners of the business who input their advice, and often join the board of directors. Founders must balance the input of each of these new stakeholders.

Series B funding

A Series B is meant to accelerate growth further. Startups that go through Series B rounds can often command high valuations, as the company has proven it has a solid business model and/or prospects. By this point, much of the early-stage risk should have been eliminated. A new lead investor frequently joins this funding round. As an example, Uber boasted a $222 million valuation after its Series B led by Menlo Ventures in 2011.

A Series B typically occurs once a startup has established product-market-fit and has significant traction.

Series C funding

By the time a startup reaches Series C, investors are usually fairly convinced about a company’s long term prospects. Series C funding is the third major injection of capital from outside sources. By this stage, a company should have reached maturity and has convinced investors that it can be viable over a longer term horizon. Series C funding rounds have historically been between $30 million and $100 million. However companies are raising bigger investment rounds across every investment round not just the seed round. Valuations are usually above $100 million, and often above $1 billion.

Conclusion

Fundraising is one of the hardest parts of a founder’s journey scaling a startup. The different stages of startup financing generally function similarly. A founder gives up equity in their startup in exchange for capital. This capital will help turn an idea into a thriving business.

Fundraising won’t be easy. The number of startups that move on to the next stage of funding becomes smaller and smaller at every next round. To progress along the series path, founders need to show serious grit, determination, and have success.

If you’re considering raising funding for your startup, take a look at Republic’s offering. We can support raises ranging from $100k to $75 million. Learn more here.

Learn about fundraising on Republic

This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected