How Venture Capital Funding Works (Pre-Seed to Series C): Valuation, Dilution, Term Sheets, and Pitch Decks
Venture capital (VC) is a form of growth financing (typically equity) that investors provide to startups with the potential to scale quickly. Because VC usually comes with a term sheet, dilution, board involvement, and a time-bound path to an exit, it’s most useful when the business model can credibly support rapid growth and venture-level returns.
Video summary of the article: (If the phrases “pre-seed vs seed,” “Series A valuation,” or “how much equity should I give up?” are on the checklist right now, this guide will help frame the trade-offs before any investor meeting).
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 Fund raising process?
- The first step to raise VC is to package the story into an investor-ready pitch deck (and supporting metrics), then approach either a venture capital firm or an angel investor..
- The investor/VC firm performs due diligence on the team, market, traction, unit economics, and legal/financial basics.
- Once due diligence is completed, the firm or the investor pledge an investment in exchange for equity. In practice, the “equity” details get negotiated through the term sheet—valuation, liquidation preference, pro-rata rights, option pool sizing, governance, and investor protections. These terms matter as much as the headline valuation because they directly affect founder dilution and outcomes at exit.
- The firm or investor takes an active role in the funded company (mainly as a board member)
- The investor usually exit in around 4-6 years, when the startup executes on its exit strategy
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, and may rely on close friends, supporters, and family. Pre-Seed Funding may also be called the Bootstrap phase, and it’s common for early checks (if any) to be informal; sometimes equity, sometimes a simple note, and sometimes nothing at all until the plan is clearer.
Click any link to find Pitch Decks at each stage: Early Stage, Pre-Seed, Seed, Series A, Series B, Series C, Series D, Series E, Late Stage, of Funding.
Seed Funding:
Beyond friends and family, incubators and accelerators (and sometimes institutional venture capital firms) participate in this round. An investor participating in seed funding is often referred to as an “angel investor.” Angels tend to go in early and usually expect an equity stake (or an instrument that later converts into equity).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 Stage, Pre-Seed, Seed, Series A, Series B, Series C, Series D, Series E, Late Stage, of Funding.
Series A Funding:
Once a business has developed a track record validating market/product fit, Series A funding can be raised. During Series A, investors are looking for validated demand, a repeatable growth motion, and a business model that can scale, plus a clear plan to deploy capital efficiently.
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 Stage, Pre-Seed, Seed, Series A, Series B, Series C, Series D, Series E, Late Stage, of Funding.
For founders still deciding whether to raise at all (or how to fund the first growth push), 4 Strategic Ways to Start a High-Growth Startup with Zero Funding in 2026, is a useful counterbalance before signing any term sheet.Series B Funding:
Companies going for Series B have already developed a user base, validated their business models, and proven 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 can pull in other investors, typically with a clear “use of funds” plan (hiring, go-to-market expansion, and product scaling).
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 Stage, Pre-Seed, Seed, Series A, Series B, Series C, Series D, Series E, Late Stage, of Funding.
Series C Funding:
Companies looking for Series C funding have a proven business model and a customer base that’s growing, either steadily or like a hockey stick. At this point, funding is often used to develop new products, expand into new markets, or acquire other companies, and the priority becomes building durable advantage at scale.
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 Stage, Pre-Seed, Seed, Series A, Series B, Series C, Series D, Series E, Late Stage, of Funding.
A simple lens: Seed proves the problem is real, Series A proves growth can repeat, Series B proves growth can scale, and Series C funds category leadership (or the push toward IPO/acquisition)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 Stage, Pre-Seed, Seed, Series A, Series B, Series C, Series D, Series E, Late Stage, of Funding.
Final thoughts...
Funding is a lever that enables investors to support entrepreneurs as they materialize their visions. Entrepreneurs, on the other hand, give investors a chance to get onboard at the ground floor. The best outcomes come when both sides align on the path to value creation and the exit, whether that crystallizes through an IPO or an acquisition.If this topic is useful, “How HBS Online went from $0 to $100 Million in Revenue with in 7 Years from Inception”, is a solid example of how a clear growth thesis translates into a fundraising narrative.”
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