The angel series, series A, series B, series C … what’s the difference and, most importantly, when’s the right time for you to invest?
The Idea – Pre-Seed Funding
This is often the first stage of funding, where the entrepreneur is beginning to get their idea and business off the ground. Usually at this stage the start-up is developing prototypes and concepts. Investors here are usually the founders of the start-up themselves, friends and family, and angel investors and incubator firms looking to invest when the business is just starting out.
During this stage investors look for a unique and promising business idea. They can invest anywhere between $1,000 – $50,000, depending on the business’ needs for prototyping, and usually expect to stay with the business throughout its growth. The median pre-money valuations across all industry sectors for pre-seed ventures is $0.6million.
Some founders may look to use rewards-based crowdfunding to raise funds by pre-selling their product or service.
Planting the Seed – Seed Funding
Here, early financial support is given to help the business get established. Businesses raising seed funding are often still in their early stages, usually looking to further develop product offerings and conduct market research and product validation.
Investors during this stage look for equity/ownership in return for their investment. They are often happy to take a seat at the table, provide guidance, mentorship and expertise. Investors in this stage typically still consist of angel investors, family, friends and incubator firms. Venture capital firms and high-net worth individuals interested in start-up businesses may also invest. Seed funding investments can range anywhere between $50,000 – $500,000. The median pre-money valuations across all industry sectors for seed ventures is $1.4million.
A is for Advancement – Series A
At this stage, the business usually has some kind of track record, like an established user base or early revenue. A business looks to Series A funding to help it advance its customer/user base and product offerings. Investors investing in this stage are not just looking for great ideas, but a company with a strong strategy or business plan that will generate long-term revenue growth and capital appreciation.
Investors investing in Series A rounds are often traditional venture capital firms. Angel investors may also invest in this round, but usually have less influence compared to what they had in the seed funding stage. The median pre-money valuations across all industry sectors for startup ventures is $3.2million. It is common for businesses during this round to acquire an “cornerstone investor”. A cornerstone investor is usually a single or small number of investors or venture capital firm. Once a business successfully secures them in an A round, it can be easier to attract more investors.
B is for Build – Series B
Businesses in this round usually want to get past the development stage and expand market reach. Series B funding is used to grow the business and generate and meet demand. During this stage, businesses may build on their existing talent, sales, promotion and technology. The valuations of such businesses often reflect how well-established they are – especially if they successfully ran a Series A round.
Investors during this round look to see how well the business can handle the proposed expansion and whether they have or can get talented employees to support this. Investors during this stage are likely previous investors wanting to reinvest and maintain their piece of the pie. Venture capitalists that specialise in late stage investing also invest in this round. The median pre-money valuations across all industry sectors for early expansion ventures is $11.3million. Like with Series A, the business may require a cornerstone investor again.
C is for Cultivate – Series C
At this stage, businesses are looking for additional funding to help them expand globally, develop new offerings/products, potentially acquire another business or boost their valuation before an Initial Public Offering (IPO).
Investors during this round are looking to grow the company quickly and successfully and get more than double the amount of their investment back. Valuations of such businesses are often based on hard data such as established revenue streams, proven histories of growth and strong customer bases. Those investing during this stage are often hedge funds, investment banks and private equity firms.
D is for Determination – Series D
Series D funding is usually undertaken to achieve the amount the business set out to raise in the previous round. The business may need an additional push before an IPO or may want to stay private for longer.
Series D may also be a “down round”. A down round is when a business raises funds by selling shares which are valued lower than in the last round. Over 113 recorded investment rounds were down roads in 2018. The median down-round valuations are 31% lower than the previous round’s value. A down round may help a business get through a tricky period, however, raising funds after a down round can be difficult. This may be because investors lose confidence in the business.
Investors in this round can be those mentioned previously who need to support the business to protect their earlier investment, but also investment companies that specialise in investing in underperforming, distressed business assets.
If you’re interested in investing in private businesses at any of these stages, please get in touch!