Capital raising has always been a challenging task for entrepreneurs, more so when it comes from venture and angel funds, who unlike banks do not judge your business funding on the physical and liquid asset one owns. As the start-up ecosystem fosters and more ventures emerge, the mortality rate of companies that could not sustain has also risen.
While getting the initial investor is the toughest part, a lot of big ticket fund raises in the past two years have seen dwindling revenue figures, questioning whether all of that money could have been put to better use. To avoid thinking that it’s necessary to get acquainted with the different stages of fund raising and why each stage is important.
Typically rounds are depicted by alphabets, where they correspond with the development stage of the companies that are raising capital like Series A, B, C and so on. Although there is no fixed standard on what amount depicts which round, the natural streak is to get higher investment as you move ahead in the stages.
The main differences between these rounds are the maturity levels of the businesses, the type of investors involved, the purpose of raising capital and how it is ultimately allocated.
Let’s find out what each round depicts, why it’s important, which are some of the funds operating in these spaces in India, and some start-ups who are in this phase.
This stage is mainly the conceptual one, where most of the money comes from friends, family and personal or business loans. This stage also includes the various accelerators that have cropped up in the past few years, although some of the bigger accelerators fall in the Seed Stage category as they offer higher disbursements and greater support.
Most government incubated hosted startups fall under this category, along with ventures who start with no institutional capital.
At this stage money is given to a company to give it the momentum it needs to produce its initial product. Seed money gives the company just enough runway to move from this early conceptual phase toward a product. This is also the most challenging stage for a startup as the highest mortality rates for startups lie in this stage.
Axilor, Prime Ventures and Seed Fund are among some notable seed stage funds.
By this point the company has a prototype, and with the exception of science and defence tech ventures, most companies are in full operational stage. They mostly seek funding from a VC firm, or even a consortium of VC firms. The amount will be larger than the seed round and will be offered in exchange for a portion of the company, therefore the most challenging one in fund raising.
The stage is used to figure out the best business model for their company and to work out the nuts and bolts of moving your product into the actual marketplace. Sequoia, Accel Partners, Kalaari, and Nexus Venture Partners are amongst some of the well-known VC firms in this stage.
Series B refers to when a startup has a product and is operational but need enough capital to bring the product to a broader market. The money is also needed for growing a team, bulking up on business development, sales, advertising, tech, support, and more.
This ticket size could range anywhere between 10 to $50mn, depending on what stage the company is at. Norwest Venture Partners, Sequoia, Matrix Partners, are some of the funds operating in this sector.
This is all about fast growth. In series C funding, companies might move the work they’ve been doing in series B toward international markets or focus on diversifying their product for multiple different platforms. In fact, many look for acquisition and merger options at this stage itself.
The cycle of successful exists for VCs generally starts by this stage. Most companies post their series C findings have gone for a merger or sale option. Funds like Sequoia, Bain, Barring, SoftBank and more fund these rounds.
By Series D a startup should be as established as an SME and should ideally be prepping for either a merger or an IPO. Generally, if a company has good financials it does not need a Series D. This could signal that the company may have strong fundamentals but hasn’t hit growth expectations set from series C and the fund is being raised to keep the company afloat.
Traditionally, a company raising a C or D round was considered to be in trouble because most startups were acquired or went public before then. But the trend is changing as smaller rounds of funding are being raised now over a longer period as it’s become easier to raise smaller amounts.
Series E and So on
Most companies go public or get acquired by series C or D. In case a company still seeks a 5th round of funding which is Series E, it means the company isn’t ready for an IPO or it’s not found a buyer yet, in case it’s looking to sell.
Surprisingly a bunch of startups have not only raised Series E, but gone on to raise funds till as far as Series H. Technically this may be considered a disastrous, but due to the unfamiliar territory of startups going for an IPO, the trend is not being viewed that negatively as expected.
This is a pre-IPO stage, where finances are raised for the growth of expanding companies prior to an IPO. Ideally at this point, the company has several hundred employees and probably operating in more than one country.
To attract investors for this round, the company must demonstrate a track record in the industry with an established reputation and product, a history of profitability and a viable expansion plan for the business.
IPO (Initial Public Offering)
An IPO, or initial public offering, is when your company sells stock to the public for the first time. This can be debt or equity offered on a public stock exchange. In the US, it means filing with the SEC.
Holding an IPO can introduce you to thousands of new shareholders, but you must follow strict rules and regulations and give quarterly financial reports. Plus, it can be pretty expensive and you have no control over who invests in your company.
Recently, it seems that companies have been staying private longer, like Uber and Snapchat.
Talking at the maiden NSE Tech Conclave, its MD and CEO, Vikram Limaye in this regard said, “We want startups to seriously look at public fund raising. I know the decision to list is not an easy one. It brings a lot of scrutiny especially from the public eye and the investors. But the advantages are also high.”
If you are thinking about raising money from investors to help grow your company, first decide how much do you need at this stage. Keep in mind that each round gives you a chance to change your term sheet, meaning that the terms set in your early investments don’t need to be the same later on. Starting with a small funding round now can give you a chance to prove yourself in the market in one specific way and help you get better terms for your next raise.
Also, if too many funding rounds have happened (say, a company announces that they are hosting a Series E funding round) it can appear like the company isn’t being run properly, but as mentioned before, it seems that more companies are staying private longer. Each funding round that you announce communicates a message to other people about where your company is, so you should always make these decisions strategically and wisely.