You are a startup and need funding to get the business started. Timely financing is crucial for a startup to develop the product, manufacturing runs, hiring a team, and marketing. Getting seed capital during the early stage of a startup is challenging. You have no income from sales and it may take time for cash flow to start moving in but you still need to meet the initial expenses.
Entrepreneurs cover those costs by raising finance through pre-seed and seed funding. Bootstrapping, funding from family and friends, angel investors, and accelerators or incubators are the sources for initial financing. But once you have crossed the early stages after successful prototype runs and proof of concept, and your startup can be termed as a semi-successful venture with a sizeable consumer base you want to scale up the business to cover the larger market and make the enterprise grow.
Now is the time for a further round of funding, known as Series funding. The nature of your business can determine how many series of funding you might require as the business grows. Some businesses quickly turn profitable and may finance further investment through internal accruals, while others may need more rounds of investments from external sources.
Series A funding
Now your business is up and running and the business model has been proven. The business has reached the level of relative maturity and it is self-sustaining, with a measurable valuation. At this stage, the business is at the PMF stage or Product Market Fit. For any startup, it is a significant milestone and the founders can show that there is ample demand for their product or service. Here is the time when you need to scale up production even further, or you may launch a franchise model or open new offices and explore new territories.
Your business has a Minimum Viable Segment, which you target first before entering the entire market and address a wider audience. Your business has started paying its operating costs but you still need external support to scale up to capitalize on the full demand from your target segment. This is the time when you seek Series A funding.
How to get Series A funding
Venture capitalist firms and angel investors are the primary sources of Series A funding and they would want to see the progress of the startup has progressed since inception. At this stage, a business is already established have a minimum viable product or service but the investors need answers to various questions:
- Has the business reached specific revenue goals?
- Has it established a solid client base for its product or service and receiving positive feedback from those clients?
- Can the business prove a tangible demand for its product or service it is still more than just an idea?
- What is the demography of the targeted market and is that market large enough to justify the expansion?
- Who are the direct and indirect competitors in the targeted market and how is your venture different from them?
A business looking for Series A funding needs must be ready to answer these questions. A thorough SWOT analysis depicting internal and external favorable and unfavorable aspects can help you to show the correct position of the business to the investors.
Valuation of the Business
To convince the investors to bring in tens of crores of rupees into your business, you need to have a clear valuation of your company at this stage. The valuation can be reached by your order book value, or the resale price of your assets, or a mix of other key features of your business. Whichever method you choose, it must show your business in the best light and support the valuation to the potential investors.
You should also research about typically how much finance companies get through Series A funding round in your industry. A critical and thorough evaluation helps you to avoid taking more liabilities than you can afford and future accusations of concealing the facts and deliberate fraud. Remember in this round you are asking many times about what you raised as seed capital so the investors also need proof why they should put an exponential faith in the business
The investors may ask for preferred stock at this early stage since they see the potential of high growth in your business which would result in exceptional returns for their investment. You may have to part with 20% to 50% of the equity after this round of funding. These funds can be used over the next couple of years to increase the team size, launch bigger marketing campaigns in new territories to attract new clients and further development of the product or service that has made the business reach this stage.
The Road Ahead
A successful Series A funding means that the venture has proven to the investors that you are capable to handle a large scale of business. Even if the business had reached the self-sustainable stage still the volume was low and scaling up incurs costs. You have a plan in place, and once you have implemented that plan to scale up successfully you might require another round of funding known as Series B funding.
Series B funding
The business has further grown and proved that there is substantial and sustainable market demand for your goods or services. The valuation of the company is much higher in comparison to the stage of Series A funding by doing a higher volume of business. Now the company can produce a positive yield for investors, either in the form of dividends or capital gains, or both.
In principle, there is not much of a difference in Series A and Series B funding. You might seek Series B funding for expanding business in high-growth niche markets or new growth opportunities by adding to your products and services.
How to get Series B funding
Again, you will have to prove to the investors that you have a reasonable and correct valuation of your company. As the business has grown and you have built assets you might want to value your business based on these assets instead of the future order book. You have to look again at how you value your business since you are in a stronger position due to continued growth in your business.
Higher valuation means that you may have to give away lesser equity to the investors for further funding.
- Do you remember the SWOT analysis you did for Series A funding? You have proven your assessment correct to the investors and they can believe in your future revenue forecasts and that you can perform well in the industry.
- At this stage common stock is often issued as the investors tend to trust you more since the business is already strengthened by previous investors. It has resulted in a stronger reputation of the company in the eyes of other prospective investors.
- This funding can be used to grow various functions of the business: sales and marketing, research and development, etc.
The Road Ahead
You have successfully got the Series B funding have deployed the funds. But what does stop you here to go further? Founders, employees, stakeholders, everybody wants to grow more. For further development, the company needs another round of funding known as Series C funding.
Series C funding and beyond
Now you have established yourself in the industry and everyone wants a piece of you. You have proven to the investors and the industry experts that your business model is profitable. Because of your track record of achieving higher valuation for your company the most risk-averse investors get the confidence to be part of your business.
How to get Series C financing
Series C funding may be the last stage of financing raised in this way to complete your initial business plan to offer all the products and services to your target markets. Moreover, after the successful deployment of Series C funding you to go public and you could use some part of the funding to start the process of initial public offering or IPO.
- Institutional investors like Hedge funds, Investment banks, Private equity firms are the type of investors that put in their money in your business at this stage.
- Previous investors might want to sell their equity to make sizable capital gains.
- A primary feature of Series C funding is that you are more likely to gain full control of your business without interference or support from the investors.
- The money raised through Series C funding is used for creating a new product or service, capturing significant market share, acquisitions, and expansions.
- Many times, the companies use Series C funding to expand internationally.
The Road Ahead
For most of the companies, if the founders still have substantial equity left in the business, they could go for further stages of Series D and Series E round of funding and offer that equity. But usually Series C round of funding is the last time the company raises the finances in this way. Valuation is at its peak since starting of the business, so usually, companies choose to go ahead with an IPO rather than going for further series of funding.
Either way, the business is healthy and profitable that has generated good returns for the founders and the investors.
The basic difference between Series A, B, and C funding is to understand what the investors expect from the startup at each stage. Past accomplishments and the prospects of future growth determine each series of funding. However, the benchmarks vary from industry to industry, but thorough research may present a contemporary range of the funding the business may raise.