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 How does Venture Capital and Series A, B, C Funding Work?

What is Venture Capital Funding anyway?

Venture capital (VC) is a type of financing, mainly equity based, which investors provide to a startup that have growth potential. Investing in startups is risky for investors, albeit the potential for above-average returns is an attractive payoff. 


Video summary of the article:

Venture capital is a subset of private equity (PE) and developed as an industry after the Second World War. 

Harvard Business School (HBS) professor Georges Doriot is generally considered the "Father of Venture Capital." He started the American Research and Development Corporation (ARD) in 1946, to invest in companies that commercialized technologies developed during WWII. ARDC's first investment went to a firm that wanted to use x-ray technology for cancer treatment. In 1955, the $200,000 initial investment yielded $1.8 million when the company went public.

Three primary regulations - Small Business Investment Act (SBIC) in 1958, the Revenue Act of 1978 and Employee Retirement Income Security Act (ERISA), popularized venture capital as a funding avenue. 

What is the Venture Capital (of Fund raising process)?

  1. The first step to raise VC is to submit a business plan, either to a venture capital firm or to an angel investor. 
  2. The investor/VC firm, perform due diligence, about the firm.
  3. Once due diligence is completed, the firm or the investor pledge an investment in exchange for equity
  4. The firm or investor takes an active role in the funded company (mainly as a board member)
  5. The investor usually exit in around 4-6 years, when the startup executes on its exit strategy
Click any link to find Pitch Decks at each stage: Early StagePre-SeedSeedSeries ASeries BSeries CSeries DSeries ELate Stage, of Funding.

What are the types of Venture Capital funding rounds? 

Pre-Seed Funding:

Refers to the time horizon, in which the founders are first getting their idea off the ground. Usually, during this round, founders are themselves the funders. They may also rely on close friends, supporters and family. Pre-Seed Funding may also be called the Bootstrap phase. It's also likely that investors (founders, friends and family), at this stage are not making an investment in exchange for equity in the company.

Click any link to find Pitch Decks at each stage: Early StagePre-SeedSeedSeries ASeries BSeries CSeries DSeries ELate Stage, of Funding.

Seed Funding:

Beyond friends and family; incubators and accelerators, along with Institutional venture capital firms part-take in this round. An investors participating in seed funding is also referred to as an "angel investor." Angel investors tend to go in at the ground floor, and expect an equity stake for their investment.  

Median seed investment in 2020 was around $1 million, but can range from $10,000 up to $2 million. Most companies raising seed funding are valued between $3 million to $6 million. In 2020, the median seed round pre-money valuation was around $6 million.

Click any link to find Pitch Decks at each stage: Early StagePre-SeedSeedSeries ASeries BSeries CSeries DSeries ELate Stage, of Funding.

Series A Funding:

Once a business has developed a track record validating a market/product fit, Series A funding can be raised. During Series A funding investors are looking for companies with validated ideas, solid business models and a clear business strategy to drive growth and eventually profitability. 

Angel investors also re-invest at this stage, though terms and conditions are dictated by the incoming investors. Fewer than 10% of seed funded companies are successful in raising Series A (or beyond) due to tough competition and lack of investor interest.

Series A rounds investments range between $2 million to $15 million, albeit this has increased due to high tech industry valuations. In 2021, the median Series A funding was about $10 million, with a valuation of around $24 million.

Click any link to find Pitch Decks at each stage: Early StagePre-SeedSeedSeries ASeries BSeries CSeries DSeries ELate Stage, of Funding.

Series B Funding:

Companies for going Series B have already developed a user base, validated their business models and have proven to investors that they are ready to scale. Series B is often led by many of the same investors as earlier rounds, including a key anchor investor that pull in other investors.

Companies undergoing a Series B funding have valuations between around $30 million and $60 million. In 2021, the median pre-money valuation of Series B companies was $40 million. Median estimated capital raised for Series B in 2020 was around $26 million.

Click any link to find Pitch Decks at each stage: Early StagePre-SeedSeedSeries ASeries BSeries CSeries DSeries ELate Stage, of Funding.

Series C Funding:

Companies looking for Series C funding have a proven business model, a customer business that is growing, either steadily or like hockey stick. As such, funding is required to either develop new products, expand into new markets, or even to acquire other companies. So Series C is a race to the top, and is focused on growing as quickly and as successfully as possible, to have a sustainable competitive advantage in the market.

In most cases, companies will end their funding rounds with Series C and either go for Initial Public Offering (IPO), or may get acquired. If this is case, Series C may be used to boost the valuation to gain the highest return on investment (ROI) for the investors. In 2021, the median pre-money valuation for Series C companies was around $68 million.

Click any link to find Pitch Decks at each stage: Early StagePre-SeedSeedSeries ASeries BSeries CSeries DSeries ELate Stage, of Funding.

Others:

Beyond Series C, some companies can go on to Series D and even Series E rounds of funding as well. These are called Late Stage Funding. The main motivation for company to go beyond Series C, is to stay private and not worry about shareholder pressures. 

Click any link to find Pitch Decks at each stage: Early StagePre-SeedSeedSeries ASeries BSeries CSeries DSeries ELate Stage, of Funding.

Final thoughts...

Funding is a lever that enables investors to support entrepreneurs to materialize their visions. Entrepreneurs on the other hand provide investors an opportunity to get onboard at the ground floor. Therefore, both have to work as partners and share the risk reward, usually crystalizing through an IPO.