Understanding Series A, B, C, D, and E Funding [2020 Updated]
Startup Series Funding Rounds Explained
When it comes to understanding startup series funding rounds it’s easy to get caught in all of the jargon. After all if there’s one thing the technology and finance world likes, it’s confusing monikers and acronyms.
While most of the concepts around startup series funding rounds are only necessary on a need-to-know basis, it’s useful to get a holistic overview of the different rounds and how they apply.
In this article, we’re going to cover everything you’ve ever wanted to know about startup series funding rounds, from pre-seed funding to series E.
How Does Series Funding Work?
First of all, it’s important to know what series funding actually is.
Regardless of the terms used, all of these phrases represent the different points at which capital can be invested into a startup company.
While pre-seed funding and seed funding are often considered to be the first round of investment, they usually come from and friends and family of the founders.
Typically the first round of startup funding outside of a business’ immediate circle is Series A funding. This is often required when a company has generated a revenue stream, but may not actually yet be profitable.
As you might expect, the next rounds of investment are known as Series B, Series C, Series D, and Series E. Series A through C are the most commonly known series rounds, however we’ll cover everything in this guide.
Pre-seed funding is considered to be the earliest stage of the funding lifecycle, however it’s such an early stage that a lot of people don’t include it in the cycle of equity funding.
Money in this pre-seed stage usually comes from the founders themselves, their families and friends, or perhaps an angel investor or an incubator.
Pre-seed funding is considered to be a new part of the start-up funding lifecycle, and there are no hard and fast rules as to how much money you can expect to raise during this period.
What is Seed Funding?
Seed funding is considered by most, if not all people, to be the very first money that a business will need to raise. This is true whether or not a company decides to go on to try for Series A funding or not.
As you might imagine, seed funding is the money raised in order to take a start-up from the initial idea (or little seed) to the first steps of execution. This can include product development or market research.
Seed funding can often be raised from family and friends, angel investors, venture capital firms that focus on early-stage startups, or incubators. Typically angel investors are the most common type of investor at this stage.
For almost every startup, seed funding is the first and final stage of funding rounds. Seed funding allows the company to see whether or not they can gain the kind of traction necessary in order to apply for funding, and to see whether or not the business itself is a sustainable model.=
In some cases, startups decide not to raise more money because they are choosing not to open a business to further outside capital, and presently so as not every business that succeeds at seed funding will go through to series funding rounds.
How Much Money is Raised Through Seed Funding?
Just because seed funding is sought at the beginning of a company’s life, does not mean that we’re talking about small amounts of money
Seed funding is typically between $500,000 and $2 million but can be both more or less depending on the company and its scope.
The typical value for a company that is raising seed funding is between $3 and $6 million.
Series A Funding
What is Series A Funding?
So now we get into the meat of the series funding rounds. Series A is arguably the most important fundraising round in technology.
In a sense, the Series A funding round sorts the wheat from the chaff. A company that’s raised a Series A has de-risked significantly from just being an idea – at the very least, you’re looking at a company with a 7-figure present-value valuation.
Series A funds have changed a lot over the years. While at one time it was possible to raise a Series A on a promising idea or technology, the bar (and usual deal amounts) has risen substantially in recent years.
A modern Series A company has demonstrated traction & some level of product-market fit – some major KPI has shown tremendous growth upwards, and there are clear signs of penetration of a substantial market.
How Much Money is Raised in Series A?
Series A rounds are typically in the $1-5M range, valuing the company anywhere from $10-$20M – at this stage, investors are ushering in a “growth” stage. Shareholders are confident in the market, the technology & entrepreneurs, and are throwing fuel on the fire to grow the company and hit scale. This is the beginning of the growth stage, planting the seeds of heftier investments by starting with smaller funding pools.
Because the investment is higher than the seed round— usually $2 million to $15 million — investors are going to want more substance than they required for the seed funding, before they commit.
It’s no longer acceptable to have a great idea — the founder has to be able to prove that the great idea will make a great company. The typical valuation for a company raising a seed round is $10 million to $15 million.
Series A rounds (and all subsequent rounds) are usually led by one investor, who anchors the round. Getting that first investor is essential, as founders will often find that other investors fall into line once the first one has committed.
However, losing that first investor before the round is closed can also be devastating, as other investors may also drop out.
Series A funding usually comes from venture capital firms, although angel investors may also be involved. Additionally, more companies are using equity crowdfunding for their Series A.
Series A is a point where many startups fail. In a phenomenon known as “Series A crunch,” even startups that are successful with their seed round often have trouble securing a Series A round.
According to the firm CB Insights, only 46 percent of seed-funded companies will raise another round. That means that this is the endpoint for the majority of early-stage startups.
Series B is when you’ve entered rarified air. Series A funding is a very risky place for startups and investors involved, and most companies at that stage generally post a return disappointing to their valuation.
But by the time a company is raising a Series B, it’s proven its viability as a profitable business. Often called “growth stage investing”, the Series B is where angels, family & crowdfunders leave the pool, and it becomes exclusively a VC play. This is when outside investors start to become interested in your startup. MATA is a great tool to help you build your startup the right way the first time. So when it comes time for your Series B round, you won’t have to worry about expensive legal audits or due diligence, just fluid deals.
How Much Money is Raised in Series B?
At this stage, a company has a proven mote, is generating healthy revenue, and is ready to shoot for that 9-10 figure valuation by dramatically scaling & staffing up. Valuations run anywhere from $30 up to as high as $80 million, with round sizes typically sitting between $7 and $15 million.
Series B funding usually comes from venture capital firms, often the same investors who led the previous round. Because each round comes with a new valuation for the startup, previous investors often choose to reinvest in order to insure that their piece of the pie is still significant.
Companies at this stage may also attract the interest of venture capital firms that invest in late-stage startups.
A Series C company is right at the cusp of the most fabled designation in the world of startups: unicorn status.
While revenue numbers are likely still in the low millions, a Series C company has dominated their immediate market and are now looking to rapidly expand investment. This is almost always the last round a company does because the next outcome is usually an IPO or an acquisition.
How Much Money is Raised in Series C?
Companies typically use Series C funding to enter a brand new market (Uber famously burned cash expanding outside of North America for the first time) or acquire other companies.
Series C companies can be valued anywhere from $100m to $500m (although it’s typically on the lower end) – the promise of this round is to generate enough capital to 10x into the 3 comma club. Round sizes start to vary a lot more, but the average Series C round is in the $25-$30m range.
At the Series C stage, only the most seasoned VC firms, private equity, banks & hedge funds are in the game.
For their Series C, startups typically raise an average of $26 million. Valuation of Series C companies often falls between $100 million and $120 million, although it’s possible for companies to be worth much more, especially with the recent explosion of “unicorn” startups.
Valuation at this stage is based not on hopes and expectations, but hard data points. How many customers does the company have? What’s it’s revenue? What’s it’s current and expected growth?
Series C funding typically comes from venture capital firms that invest in late-stage startups, private equity firms, banks, and even hedge funds.
This is the point in the startup lifecycle where major financial institutions may choose to get involved, as the company and product are proven. Previous investors may also choose to invest more money at the Series C point, although it is by no means required.
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Remember one of the “bad” words described at the beginning of this article? The “down round.”
There’s no phrase that ripples fear in the hearts of entrepreneurs quite like that one. Simply put, a down round is when things go poorly and a company has to raise money at a lower valuation than it used to have. This usually happens when a company raises funds at a certain valuation, struggles to meet its objectives or starts faltering, and has to raise more cash to survive, this time being far less appealing to the market.
Down rounds are brutal periods for companies – investors are losing money at this point, so the CEO and her employees are facing intense scrutiny and pressure to turn the ship around.
Series D rounds are typically down rounds of funding sources. This isn’t always the case – it’s certainly possible for a company well-past the Series C to seek a higher round of financing. This is especially the case with highly technical/research-intensive products that want to continue developing a certain technology.
In most cases, however, a company that raises a Series D didn’t get a good outcome out of a Series C. At Series C stage the company has been so thoroughly de-risked, it’s quite rare for a company to flounder completely – at worst the company might not hit the billion-dollar valuation, but still slightly outpace its valuation and remain a very profitable enterprise.
Series D is the “Voldemort” of the startup world – nobody likes talking about it.
How Much Money is Raised in Series D?
Series D rounds are typically funded by venture capital firms. The amount raised and valuations vary widely, especially because so few startups reach this stage.
Series E is such a rare funding phase for businesses that it’s hard to even place it on this list. The truth of it is, an E round isn’t like most rounds – the check sizes are so substantial, the motives behind this round are all over the place. Everyone from plateauing companies looking for a cash inflection, to shrewd founders wanting to keep things private, to dated companies looking to revitalize, are all reasons why a Series E can and has happened.
If few companies make it to Series D, even fewer make it to a Series E. Companies that reach this point may be raising for many of the reasons listed in the Series D round: They’ve failed to meet expectations; they want to stay private longer; or they need a little more help before going public.
There you have it – a general overview of the different types of funding. In general, Series A-C are the most relevant for most startup founders – each represents a profoundly different milestone in the growth of a company. Understanding the difference all the way from Series A to Series E helps you understand where you are.
Regardless of which stage one is in, closing any of these rounds is quite difficult and definitely an achievement worth celebrating (before going back to work the next day at 7 am to start hitting those milestones).
If you want to build your startup and set yourself up for future funding rounds, check out Mata for creators. To transform your small ideas into big ideas worth funding, you can use our virtual business plan creator, idea manager, legal formation services, and on-demand growth services. Our formation package is fully comprehensive and provides the framework to start a company in all 50 of the US states, so you can be on your way to raising your company’s Series A to Series B, and hopefully, to Series C and beyond. Use our on-demand growth services to make it easier than ever.