A Guide to Series A, B, C Funding for Startups
To get any new business venture off the ground, you need funding. Startup finance is a crucial way for new companies to invest in prototypes, manufacturing runs, hiring staff and covering all of the usual setup costs.
The early stages of a startup business are one of the most financially challenging times. You won't yet have income from sales, you might be facing months of delay before that cash flow starts to come in, and you have all of your initial costs to cover.
But once you get past the early stages, there are more reasons why you might want to raise finance from investors. For example, you might want to upscale manufacture after a successful prototype run, you might have more products you want to bring to market, or you might need to hire more staff to cope with your business growth.
For all of these reasons, many businesses operate a further round of funding, known as Series A funding. Later financing rounds each take a letter, usually including Series B and C funding, but sometimes going as far as Series D, E or beyond.
The nature of the company can determine how many finance rounds you offer. Some ventures become highly profitable very quickly, so third-party finance is not needed, while others target a diverse range of different areas each with its own costs, and may need more rounds of investor finance as a result.
Introducing pre-seed funding: bet on the entrepreneur
Pre-seed funding is among the very first finance you raise for a new business venture. It covers the earliest costs of starting up a new company or bringing a new innovation to the prototype stage.
Pre-seed funding can be used for direct costs like tooling and machining, acquiring premises and so on, as well as exploratory costs like market research and existing intellectual property or trademark searches.
In many cases, entrepreneurs raise pre-seed funding from private sources, such as friends and family.
You may also use your own savings at this stage or take on an early-stage business loan, although institutional lenders will usually want proof of concept and a business plan.
It's important to remember that at this very early stage, you might not yet know the real value of your innovation, or even whether it has a chance to be successful.
If you fail, you might face repaying your supporters from your own savings. Alternatively, you could lose friends and family relationships if you are unable to pay those people back.
The higher risk level in the early stages can also mean you have to give away more equity to secure people's investment in your business, leaving less to offer to seed investors and in your Series A, B and C finance rounds.
Benefits and risks of pre-seed funding
If you're still not clear about what pre-seed funding is, you can find out more in our post: "What's the difference between pre-seed and seed funding rounds?"
Some of the unique characteristics of pre-seed funding are also among the most significant benefits. For example, finance at this early stage can be less formal, especially when you have support from friends and family.
The amounts of money - and therefore the total risk - are smaller, usually in the ballpark of tens of thousands of dollars rather than millions.
You'll likely have a clear idea of what you want to spend the money on, whether it's staff costs, premises, prototypes or running costs like legal fees.
And you may not need to give away as much of your equity, depending on the amount of money you are trying to raise, so that you can keep a hold of more to offer to Series A, B and C investors later.
But there are risks involved. Most new businesses fail within the first few years and, because of this, there is a good chance that your pre-seed investors will lose their money.
Professional investors know this and expect to make losses, but friends and family are unlikely to think they could lose their investment.
There are ways to mitigate this risk. For example, online pre-seed funding platforms often operate on an 'all or nothing' basis where unless you reach 100% of your funding target, the pre-seed platform refunds any pledges to individual investors in full.
It's still possible for businesses to fail, but this at least means you are more likely to get through the pre-seed stage, assuming you raise 100% of the finance you seek.
Introducing seed funding - bet on the team
Seed funding is all about maturity. At this stage, you might have a working prototype or an initial production run, but not yet have mass-market capability.
Seed investors help you to bridge that gap from proof of concept and your first sales to a fully commercialized product or service.
Upscaling your product or service can mean taking on new staff and premises, investing in equipment for automation of repetitive tasks and a more professional, machined finish, and other costs associated with building the size of your business.
The amount of seed money you need to achieve all of this can vary, but it could be in the region of hundreds of thousands to the low millions of dollars.
Because of the larger amounts involved, you're less likely to be able to raise seed funding from your immediate network, so this can be the stage where you open your business up to investors you don't already know.
To secure their support, you'll need to demonstrate proof of concept and well-evidenced sales forecasts, as well as to show that you have a talented team in place and are ready to recruit to meet demand.
How to raise seed funding
When looking for finance at this stage, you'll need to reach out to investors you haven't already approached.
You could look for startup accelerator funds and business incubators in your local area or in the industry you are targeting.
Accelerators and incubators are designed to support early-stage innovations and are ideally placed to provide the funds you need on appropriate terms.
Remember that instead of taking an equity stake, these funds often ask you to repay the money over the course of just a few years - so if your business plan will take longer than that, you'll need to find the money from somewhere to meet those repayments.
Alternatively, at the seed stage, you might find interest from a venture capitalist or business angel who is convinced by your service or product and wants to make a return by helping you grow.
Find out more in our guide: How to prepare your startup for a seed funding round
Introducing Series A funding - bet on the traction
Once your business is up and running, there are many reasons why you could want or need to raise more finance later on. This is when you hold a Series A round.
You can use investors' funds to scale up production even further, to launch a franchise model or to open new offices and other premises in new locations.
The difference at this stage is that your business model should be proven. Your existing business should be relatively mature and self-sustaining, with a measurable valuation.
Investors call this stage PMF or Product/Market Fit. It's a significant milestone for any startup to show that there is a sustainable market demand for their product.
A related term is Minimum Viable Segment, which you might want to aim to reach first. Rather than entering the entire market, this is a way to achieve sustainable demand by focusing on just one segment, before you scale up and out to a wider audience.
What is Series A funding?
Series A funding is external investment into your business venture to cover costs once you reach PMF.
At this stage, your business should be paying its own operating costs and have a valuation in the several millions of dollars.
However, you might need external support to scale up more quickly in order to capitalize on the full demand from your target market.
This is often the case when you have reached the MVS milestone but need some help to broaden your reach to the full market and not just one segment.
How to get Series A funding
To persuade investors to put funds - often several million dollars at this stage - into your business, you'll need a clear and rigorous valuation of your company.
There are different ways to value a business, such as your order book value, the cost or resale price of your assets, or a combination of several key characteristics of your company.
It's reasonable to choose the method that shows your business in the best light, but be sure that you can clearly support your valuation if potential investors question it.
By doing this, you also protect yourself against certain risks, ranging from taking on more liabilities than your company can afford, to accusations of deliberate fraud.
Make sure you know how much finance is typical in a Series A funding round in your chosen industry. It can vary a lot, especially in high-growth sectors, so some research will help you to make certain that you ask for the right amount.
Introducing Series B funding - bet on the revenue
The second major round of financing as your business continues to grow is Series B funding.
You should have a company at this stage that is relatively mature and not only covering its own operating costs, but also generating a good amount of profit.
Reaching this stage is good news for several different reasons. It shows that there is substantial and sustainable market demand for your goods or services.
For potential investors, it also demonstrates that there is good value in your company and that buying an equity stake is likely to result in a positive yield, whether in annual shareholder dividends or capital gains, or both.
What is Series B funding?
In principle, the only difference between Series A funding and Series B funding is that Series B funding comes second.
However, in practice, the different conditions under which you seek Series B finance mean that this second major seed round of fundraising often has a unique profile.
You might be looking for even more money, especially in high-tech, high-growth niche markets where new investors look for quick and impressive yields.
At this stage, the investment could also be less about expanding in existing areas, as your company should be quite mature by now, but more about investigating new growth opportunities by adding to your products and services.
How to get Series B funding
Again, you'll need to be able to show would-be investors that you have a sensible, accurate valuation for your company.
But as your business has grown and staked its claim to more of the market, you might want to look again at how you value it.
For example, instead of basing your valuation on your future order book or forecasts of future value, you might be in a stronger position to use existing data like any assets you own.
Combined with the continued growth in your business, your new valuation could be much higher and more appealing to investors who are looking to place Series B finance.
It can also have a big impact on the amount of equity you give away at this stage, as a higher valuation means you have to part with less equity for each dollar investors put into your company in Series B funding.
Introducing series C funding and beyond - bet on profitability
At a later stage, you could choose to launch a Series C funding round. Again, the defining feature of this is that it follows Series A funding and Series B funding rounds.
Because it comes even later in the life of your business, Series C financing can involve even larger amounts of money - reaching into the tens of millions of dollars.
It can also require the most convincing business profile to show to would-be investors, with a valuation that clearly indicates a thriving company with valuable assets under your ownership.
What is Series C funding?
Series C funding covers late-stage costs for mature companies and for many, it's the last round of investment raised in this way.
It could be the last money you need to complete your initial business plan, so that you can offer all the products and services needed to service your target markets in full.
Alternatively, Series C financing can be a precursor to going public, and you could use some or all of the money raised to hire underwriters and embark on the complex route toward an initial public offering or IPO.
How to get Series C financing
Different factors make Series C financing easier in some ways and harder in others.
A clear and reliable valuation of your company means you have a compelling offer to show to investors and removes some of the risk and doubt for them.
But the substantial sums of money involved will mean your offer will likely only appeal to very large institutional investors, such as investment banks, private equity firms and hedge funds.
Another hallmark of this later stage of funding is that you are more likely to have full control of how you spend the money, without interference or support from your investors.
This compares with early stages like seed funding and Series A, where you are more likely to attract the attention of an angel investor who nurtures your talent as an innovator and entrepreneur.
For most business leaders, it is a major personal milestone to reach the stage where you are the one with sole control of how you spend investors' funds, a sure sign that they have put their trust in your business expertise.
What happens after Series C funding?
For many companies, Series C round is the last time they raise finance in this way, and they fund future growth using the company's profits or from funds raised via IPO.
But this is not always true. If you still have a substantial amount of equity left in your business, you could offer this to investors in further stages, and Series D and E finance rounds are not uncommon.
Either way, you should now have a healthy, profitable business that is generating good returns for you and your investors, and making it less likely that you will need to seek external investment just to cover costs in the future.
You can find out more about how to value a startup business in the Brex Startup Valuation Guide podcast, which takes a closer look at the different valuation methods used by new companies and could help you to decide which is best for you.