A little investor’s advice.
The real scenarios before an initial public offering (IPO) are not always ideal. Not every company gets to grow with little or no “outside” help. Most of the successful startups worked persistently to raise capital through funding rounds. This is the most common founder’s journey and as a friendly advice we must quote investor in renewable energy, Tomás Ocampo who in an interview with Amalgama suggested founders to “take fundraising as a process”.
Why think of funding as a process?
Funding rounds give external investors the chance to take a stake in a growing company in exchange for equity, or partial ownership of the company. In some funding discussions the terms “Series A”, “Series B” and “Series C” may come up when talking about funding rounds; these terms are referring to this process of growing a business through outside investment in the process of turning a great idea into an innovative global company, suitable for an IPO. Understanding the distinction between these rounds is key for analyzing news regarding the investing world.
Who are the main actors in funding?
There are two main roles in every funding story. The first role is the person/s who wishes to get the necessary funds to get their business running. Is the company founder and usually the owner of the idea.
On the other side, are the potential investors who not only support entrepreneurship and share the vision of those businesses but also expect gains from their investment.
How do they interact? Basically investments are arranged so that the investor gets partial ownership of the company and gets rewarded in proportion with the investment made when the company grows and earns profits.
How Funding Works
The first thing that must take place is a valuation of the company in question. The valuation will determine the types of investors who will want to get involved and the reasons for the new search for capital. Business Valuations are done based on various factors such as management, proven track record, market size and risk.
Once a company has been valued, it can start participating in rounds of financing to fund its growth.
Stages of funding a new business
The pursuit of new capital can be puzzling. Let’s take a glance at each funding round and what they mean for founders, companies, and investors.
The earliest stage of funding new companies is usually known as “pre-seed” funding and it’s when businesses first start getting off the ground. Typically “pre-seed” funders are the founders themselves with their personal savings or also close friends, family or closest network.
This is why this stage is not even considered a funding round. How long this will take, depends on the initial costs necessary to develop the business idea. Since these are the first capital injections It’s likely that investors (founders and close network) are not investing in exchange for equity in the company.
This is when equity funding officially begins. The Seed Funding Stage is when an enterprise raises money for the first time. Seed Funding is meant to enable a company to finance its first market research since it is usual that in this stage companies receive assistance in determining target audiences, product discovery and development.
In a seed funding scenario we’ll find different kinds of possible investors besides the ones already mentioned, such as incubators or venture capital companies and the so-called “angel investor” who is not afraid to bet on riskier ventures (like startups with almost no proven track record) in exchange for an equity stake. The seed fund amount fluctuates a lot, some may raise $12,000, while others raise $3 million. On average, companies raising inversions in seed fundings rounds are valued between $3 million and $6 million.
Series A Funding
This is a stage where only businesses that have developed a positive track record (an established user base, consistent revenue figures among other key performance indicators) can opt for when their goal is to increase user base and expand their product offerings.
In Series A funding, investors are seeking for great ideas but mainly a plan for developing a business model that delivers long-term profit. At this stage frequently investors participate in the political processes of the companies. Angel investors remain present at this stage, but with much less impact in this funding round than in the seed funding stage.
Series B Funding
By seeking funding in the Series B rounds, companies are aiming to move to the next level after the initial stage of development is complete. The expected investment in this round will help organizations increase their market share once they demonstrate to investors that they are prepared to scale their success.
Growing in success would imply growing in team, areas and structure (business development, sales, advertising, technology, support and employees). In this second round the business is more solid and the risk is lower for investors than in series A Funding. In 2020, the median estimated capital raised in a Series B round was $26 million.
Series C Funding
A business that gets in a Series C funding round is already successful and probably operating at a national level with brand awareness and looking to develop new products, expand into new markets, or even to acquire other companies.
Investors trust much more in these companies where the risk is even lower than in Series B Funding Rounds and they do expect to receive more than double the amount invested back.
Many of these organizations use Series C funding as a platform to boost their valuation in anticipation of an IPO. At this point, companies have higher valuations. In 2021, the median pre-money valuation for Series C companies was around $68 million, although some companies going through Series C funding may have valuations much higher.
Investor’s advice for founders
After taking a look at the stages of the process, we can only quote Tomas words once again prior to our conclusion.
“…an investor is like an employee that you cannot fire. So once you take that money, you are gonna have them around for a while. It doesn’t mean you will have to talk to them all the time, but they are gonna be there. So it’s really important who you choose your investors to be.”Tomás Ocampo
It’s important to understand what kind of participation from the investors your company is going to receive on every stage of the funding rounds. We must take the time to get to know and understand the investors as well in order to be sure that it’s a good culture match.
If you have an idea or are working on a project you could use some help with, feel free to contact us! We’d be happy to help you… or who knows? Maybe be your new partner in crime.
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