The process of seeking investors for the first time can be confusing, especially when it comes to understanding the different types of investment rounds. Funding rounds are often sequential and generally increase as the company grows and seeks bigger opportunities.
Here's a brief overview of the typical funding rounds a startup may go through and what to consider when pitching investors at each stage.
Preseed funding
A new company needs money to jump-start its initial operation. The first round of money a company uses is preseed funding. These funds are typically from individuals who believe in the company's business model or product, such as the company's founders.
Another source of preseed funding may come from friends and family. One of the defining characteristics of preseed funding is a lack of compensation. Ownership percentages are typically not exchanged at this stage. The fundamental purpose of preseed funding is to prove the idea has viability.
[Read more: A Practical Guide to Funding Your Small Business With Business Loans and Beyond]
Seed funding
This is the first official round of funding a new company will undertake. A company seeking seed funding has typically explored the business model and needs additional funds to make the idea a reality. At this stage, the company may have an inherent value associated with it. A typical seed round valuation usually falls between $2 million and $10 million.
The source of seed funding is more expansive than preseed funding, as company equity is exchanged for capital. Since the funding is eventually rewarded, the funds raised during this round are typically larger in scope. The average seed funding round in 2023 was $1 million.
Series A funding
The series A funding round typically comes from more traditional funding sources spearheaded by industry titans such as Sequoia Capital or Google Ventures, for example. In this round, a venture capital firm will serve as an "anchor" in the funding process, attracting additional investors.
The median funding amount for a series A funding round in early 2024 is $18 million, a significantly higher amount than the average seed valuation. Series A funding rounds are a milestone for startups because they demonstrate market demand for the company's product or service and that the company is poised for growth.
A company seeking seed funding has typically explored the business model and needs additional funds to make the idea a reality.
Series B funding
After a company's expansion has proven to be viable, it is time to move on to series B funding. This form of funding is used to expand a company's market reach. The funding is often used to increase advertising efforts, bolster tech support, develop sales models, and hire employees.
The sources of this funding round are similar to series A funding, but a company may attract new sources that specialize in later-stage investing. Expanding a company costs serious capital. This is reflected in the average funding amount for a series B round, which was $35 million in the first quarter of 2024.
Series C funding
A company entering a series C funding round is typically looking to diversify an already successful business. Funding is mainly used to develop new products, expand into additional markets, or even acquire other businesses. Since the company is now a successful venture, more established and risk-averse capital sources, including hedge funds, private equity firms, and investment banks, provide support.
The valuation during series C is based on hard data, as the company has a proven track record of expansion and has shown that its goals are attainable. The allure of possible future success is no longer a significant factor. This stage is often the last funding round, but it is not uncommon for a company to enter into a series D or even a series E round.
[Read more: Financing Strategies for Every Stage of Your Business]
Initial public offering
An initial public offering (IPO) is the final funding stage. It allows the general public to buy shares in the company. This stage involves a new level of public transparency. The general public is entitled to company documentation, including the company's prospectus and privately held filing information. The company is no longer private after an IPO.
An IPO unlocks a significant level of funding while offering a lower equity cost. Besides the legal costs, the only downside is a significant loss of company control. A company with an IPO is no longer a startup and typically operates globally.
Example: Airbnb's journey from preseed to IPO
Airbnb's funding journey provides a great example of how a company can grow from preseed to IPO in less than a decade. Here are the rounds of funding Airbnb received as it grew in popularity.
- Preseed and seed: Airbnb's preseed funding came from an initial $20,000 investment from Y Combinator followed by a seed funding round from Sequoia Capital and Y Ventures for $600,000 in 2009.
- Series A: In November 2010, Airbnb secured $7.2 million in series A funding led by Greylock Partners. This round helped the company expand its operations and improve its product offerings.
- Series B: Airbnb raised $112 million in July 2011, led by Andreessen Horowitz. This significant investment allowed the company to accelerate its growth and expand internationally.
- Series C: In October 2013, Airbnb raised $200 million in a series C round that was led by Founders Fund. This funding round helped the company solidify its position in the market and continue its rapid expansion. After this round, the company was valued at $2.9 billion.
- Series D: Airbnb further raised a series D round in April 2014, which brought in $450 million, led by TPG Capital.
- Series E: In June 2015, Airbnb raised $1.7 billion, significantly boosting its valuation and providing resources for strategic initiatives.
- Series F: Airbnb's final private funding round came in September 2016, during which the brand raised $1 billion.
- IPO: Airbnb went public in December 2020, offering $68 a share for a $47 billion valuation.
Airbnb's journey from a small startup to a publicly traded company demonstrates a classic progression through funding rounds, with each stage bringing in larger investments to support the company's growth and expansion.
Of course, there are other types of startup funding to consider: loans, grants, crowdfunding, and business accelerators. Additionally, revenue-based financing such as Clover Capital can give businesses the cash influx needed to get started. Explore all of your options to ensure you find the one that's right for you.
This article was originally written by Cory Paller.
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