Getting funded is what startup founders want more than anything. However, getting it wrong can be costly. There are several factors to consider before committing to money. The stage of the company, industry, and business cycle can all have a massive impact on the amount of financing required.
According to HBSaccelerate, In 2017, over 70% of tech startups failed to exit or raise follow-on funding despite their growth.
If you are an aspiring entrepreneur looking to raise capital for your business, this article will help you understand how much money you should raise and when.
The general rule of thumb is that companies should raise sufficient funding for about two years before the next round comes along. Occasionally, this does not occur, either because of internal misdirection or mismanagement of funds. Additionally, it can also occur due to external factors such as market volatility.
Investor Chris Dixon takes this a step further and recommends adding a 50% buffer on top of your required funding to account for unexpected obstacles.
Let’s consider the different stages of funding:
Funding begins with the seed round. Business owners raise seed capital to get things up and running. Seed funding is typically used for product development, market research, and other logistical aspects. This is the idea phase of a startup where the founders are trying to perfect their product according to market needs.
According to Crunchbase, seed funding investments can range from anywhere between $10,000 to $2 million. The equity given up for seed funding is generally between 10% and 20%.
Next comes funding rounds A, B, and C (or, in some cases, A through D). These funding rounds are all determined by the stages that a company goes through as it scales.
Series A Funding
This is the first institutional round of financing. It focuses more on startups with proven business models that can generate profits immediately. In Series A funding, investors are looking for a high return on investment (ROI). So having an efficient problem-solving idea is crucial to raise funds in this round.
Moreover, you also need to have a solid strategy for taking investments and turning them into long-term growth.
Round A investors are typically venture capital firms. According to Crunchbase, Round A investments can collect anywhere between $2 million to $15 million.
The company typically gives 25% to 35% of its shares to series A investors. However, in some cases, it can be as high as 50 percent or as low as 10 to 15 percent. Most of it depends on the market opportunity and the uniqueness of the solution the business is providing.
After the funding, the company’s working capital will usually last 6 to 18 months after the round is completed.
If you raise a Series A, it is essential to understand how you will utilize that capital and what it will do for your business. Once you are clear on these goals, you need to raise enough money to help you achieve them.
Series B Funding
After the development stage, Funding Round B signals growth. At this point, startups are expanding and have a foundation of consumers that is steadily growing. Round B helps startups transition into well-established companies.
Series B is for acquiring capital to meet the growing demand for your product or service. The money is also used to expand on market research. Series B usually consists of funding between $7 million and $10 million.
However, investments can far surpass that range. The behavior analytics platform Mixpanel raised over $65 million during its Round B.
However, there can also be bridge rounds. These do not count as series A, B, or C, but instead as intermediary rounds and serve to fill the financial gaps between main rounds. For instance, Dubai-based eyewear e-commerce company eyewa raised 2.5 million dollars in a pre-Series B bridge round.
If the startup needs additional money after it develops, it may need to embark upon a Series C funding round.
Series C Funding
The Series C round is for scaling the company’s vision and further expanding the business into new territory. Series C funding rounds are for businesses that are very successful and need more capital to continue scaling. Round C can also mean that startups want to further their success by creating new products or expanding their reach.
Typically, Series C funding amounts range from $30M to $100M; on average, this is $50M. A Series C round could be the last round regarding venture capital financing, depending on the business strategy.
On the flip side, the number of investment rounds a startup can raise after Series C is theoretically unlimited.
Series D Funding
Many companies finish raising money with their Series C. However, there are a few reasons a company may choose to raise a Series D. One generally goes for the Series D Round for financing a special situation, such as a merger or acquisition, and so is not in the normal venture capital financing progression.
Companies that go for Series D funding do so either because they are looking to give a final push before going public or because they failed to achieve their goals during the Series C funding.
Also, the range of money raised varies a lot here, and there are no fixed strategies on how much to raise. Most of it depends upon the circumstances and the willingness of investors.
The different funding rounds operate in essentially the same manner. In return for equity in the company, investors provide cash. The only difference is that investors make slightly different demands from the startup in different rounds.
Nonetheless, seed investors and Series A, B, and C investors help ideas come to attainment. Series funding enables investors to support entrepreneurs with the proper funds to carry out their dreams, perhaps cashing out together down the line in an IPO.
And while this is a shared roadmap, it’s not the only defined path to success for businesses. Check out where your business and its valuation stands. This will help you gain a clear understanding of how much funds you should raise and when.
Also read our guide Pitching to Investors: Best Practices During the COVID-19 Crisis for more information that can help you. If you’re fundraising, check out our exclusive events tailor-made to your funding rounds.