It is important to know what the funding rounds are about when you’re dealing with professional funding. How do funding rounds work?
Pre-seed or a seed round of funding
When people talk about a pre-seed or a seed round of funding, it’s in the early stages of a business where you’re trying to get traction and actually build infrastructure. It is early stage revenue, and what those funds are used typically for is
Create better traction
They’re not even interested if you don’t have some traction, and you’ve proven that people would buy your product. If they’re going to do a pre-seed or a seed round, they’re interested in providing additional traction for you. Better traction is one of the focuses of this round.
You have to prepare your infrastructure, even in stage one before you have product-market fit. You may need some more people to standardize your processes, increase production because you are selling and this is where a lot of these pre-seed/seed rounds would come in. They are typically smaller amounts of money. Angels invest typically in the $25,000 to $500,000 rounds.
Angel groups do a thing called syndication, where they combine their investments and create greater capabilities. In a $500,000 pre-seed or seed round for an angel group that is syndicated, it may be 10 angels putting in 50,000 each, they could go higher, I mean, angels can go up to $750,000 or even a million dollars, but it is not very common. Usually, they’re in that $25,000 to $500,000 realm. We are dealing with angel investors and angel investor groups in these pre-seed or seed round rounds.
We can have things that are very different when you’re playing with experienced venture capital players. If I’ve got a business idea and a business plan, and I have done venture capital before, I may get millions of dollars to launch an organization, but I am trying to tell you what the norm is for most that you are going to face. A pre-seed or seed round is in this $25,000 to $500,000 range by angels and angel groups to help you get better traction and build infrastructure.
Series A Round
Product Market Fit
When we’re talking about a series A round, it’s typically to take you to product-market fit, and, of course, when you are around or at product-market fit, a lot is happening, you got good traction, maybe you don’t have a product-market fit yet. You are not blowing the doors out going to the moon, but you are doing some good traction. Series A rounds can be very valuable here in getting that last step to product-market fit in really nailing down the 100% solution that everybody wants.
Follow On Markets
We could even be looking at follow-on markets. When doing market segmentation, we have market penetration and market expansion which are a little bit different and can lead to follow-on markets after discovering the beachhead market.
$1-10M – Angel Groups, Early VC
Typically at $1-10M, we are at the very high end of the angels groups and we are in early venture capital money. They are interested because you are showing great promise with the product, it’s selling and there are all those markets that you can go into and they want to help you get there.
Series B Round
How do funding rounds work? This series is for moving a business from Product-Market Fit to Follow on Markets.
It is taking the business from product-market fit into other markets, market expansion, market penetration is occurring at this time.
Follow on Markets
We are dealing with follow-on markets and picking on more sales as we expand our reach because we have gotten product-market fit.
We may be acquiring talent or even acquiring companies. There is this concept of acquisition hires where you buy a company because you just want the talent, we may throw the company away. That may be occurring in this Series B round as we are acquiring a lot more talent because we are building out that whole product solution for an expanding mainstream market
$5-50M Venture Capital
We could be looking at $5-50 million here. We are in the strong venture capital range here and this is where a lot of investing is occurring with venture capital
Scaling and Acquisition
Series C are for massive scaling or being acquired by another company. We could also be doing acquisitions ourselves. It is a lot of consolidations, bringing all that product solution together, scaling the organization, rapid growth; we need big money.
Preparing for acquisition
A lot of companies at this point are even preparing to be acquired by the great big companies. They are getting those finishing touches to be appealing to the great big organizations that are many billions of dollars.
$10m – $100M
We could be looking at $10m to $100M, and it could be going way north as well; Venture capital, hedge funds, investment banks and private equity. A lot of that could be coming to play in this realm because we have proven predictable revenue. We are at the top of the mainstream market, and we have got a really good product. It has been selling for a while, and it is fairly predictable.
One of the challenges that we have especially in earlier-stage growth organizations, even back in series A and B levels, is that we are riding up that curve to the mainstream, and there is not much patient capital. This one important factor to consider when looking at how do funding rounds work? Even with venture capitalists, they are looking at five to seven years. It takes ten years to hit maximum revenue generation and your primary user maximum revenue generation takes ten to fifteen years. If venture capitalists are looking at three to seven years, it is not patient capital, it is not waiting for you. You have got to do another level of funding to keep moving up the curve. When we get to private equity and hedge funds and stuff like that, we start to look at capital that is going to sit there for a while and just milk the mainstream for the money that they are making out of that.
How Do Funding Rounds Work? These are some examples of some of the rounds that if you hear what they are talking about, series A, B, and C round, you kind of have an idea what they are talking about in funding.