TL;DR
A fundraising round refers to the stage at which a startup raises money from investors to fund its operations, growth, or product development.
During each round, the company typically sells equity (shares) in exchange for capital.
Each fundraising round has a specific purpose and involves different types of investors. Early rounds focus on getting the company off the ground, while later rounds are geared toward scaling the business and preparing for a potential exit, such as an acquisition or Initial Public Offering (IPO).
How Does a Fundraising Round Work?
The process of a fundraising round generally follows these steps:
1. Setting Goals and Valuation
Before launching a fundraising round, a startup sets specific financial goals—such as how much capital it needs to raise and how the funds will be used (e.g., product development, hiring, marketing).
The company also works with advisors, such as financial experts or venture capitalists, to determine its valuation. Valuation is critical in each round as it determines how much equity will be sold in exchange for the investment.
2. Pitching to Investors
The company then pitches to potential investors, which could include angel investors, venture capital firms, private equity investors, or even strategic partners.
The pitch typically includes a business plan, financial projections, market opportunity, and the company’s overall vision.
3. Negotiating Terms
Once an investor expresses interest, the startup negotiates the terms of the investment. This includes the valuation, the amount of capital to be invested, and the equity stake the investors will receive in return.
Other terms, such as liquidation preferences, voting rights, and board seats, are also negotiated.
4. Closing the Round
After both parties agree on the terms, the deal is formalized, and the investors provide the capital in exchange for equity in the company. The company can then use the funds to achieve its growth objectives as outlined in the fundraising round.
Types of Fundraising Rounds
There are several stages of fundraising, each with different purposes, investor types, and risk profiles. The main fundraising rounds are Pre-Seed, Seed, Series A, Series B, and Series C (with potential for additional rounds like Series D and beyond).
1. Pre-Seed Round
The Pre-Seed round is the very first stage of fundraising for a startup, typically before the company has a fully developed product or service. Pre-seed funding often comes from the founders themselves, family, friends, or angel investors. The primary goal is to get the business off the ground by developing a Minimum Viable Product (MVP), conducting market research, or forming an initial team.
- Amount raised: Typically under $1 million.
- Investors: Friends, family, angel investors, and sometimes accelerators.
- Goal: Establish the basic idea and start building the product.
2. Seed Round
The Seed Round is the first official stage of equity fundraising and is aimed at supporting the company’s early-stage development. At this point, the company may have a prototype, some initial market traction, and a small team. The capital raised is used to refine the product, conduct more extensive market research, and start generating revenue.
- Amount raised: Typically between $500,000 and $2 million.
- Investors: Angel investors, seed funds, early-stage venture capital firms.
- Goal: Finalize product development and achieve product-market fit.
3. Series A Round
The Series A round is the first significant round of venture capital financing. By this stage, the company has a proven business model, early revenue, and strong market potential. The funds raised in this round are often used to scale the business, grow the customer base, and optimize operations. Investors in a Series A round focus on companies with strong growth potential and a clear path to profitability.
- Amount raised: Typically between $2 million and $15 million.
- Investors: Venture capital firms, institutional investors.
- Goal: Scale the business, improve monetization, and expand into new markets.
4. Series B Round
In the Series B round, the company is now focused on scaling rapidly. It has likely achieved product-market fit and is generating significant revenue. The funds raised in a Series B round are often used to expand into new markets, increase production capacity, hire more staff, and further develop the company’s technology or product offering.
- Amount raised: Typically between $10 million and $30 million.
- Investors: Venture capital firms, institutional investors, and sometimes private equity firms.
- Goal: Scale operations and reach profitability.
5. Series C Round
The Series C round is for mature startups that have a proven business model, significant revenue, and are preparing for further expansion or an exit, such as an acquisition or IPO. The capital raised in this round is used to expand internationally, acquire competitors, or develop new product lines. Investors in this round expect lower risk and are focused on generating substantial returns in a shorter time frame.
- Amount raised: Typically $30 million and above.
- Investors: Late-stage venture capital firms, private equity firms, hedge funds, and corporate investors.
- Goal: Scale globally, acquire companies, and prepare for an exit (e.g., IPO or acquisition).
6. Series D and Beyond
Some companies go beyond Series C and raise Series D or additional rounds if they need more capital for expansion or if they’re waiting for favorable market conditions for an IPO. Companies raising Series D funds may be looking to address short-term financial challenges or accelerate growth ahead of a potential exit.
- Amount raised: Varies based on company needs and market conditions.
- Investors: Late-stage venture capital, private equity, hedge funds.
- Goal: Resolve challenges or prepare for an exit.
Impact of Fundraising Rounds on Valuation
Each fundraising round affects the company’s valuation and ownership structure. As the company raises more capital and grows, its valuation typically increases. This is determined by the company’s progress, market position, revenue growth, and investor interest.
- Pre-Money Valuation: This is the valuation of the company before new investment is added.
- Post-Money Valuation: This is the valuation of the company after the new capital from the fundraising round is added. It includes the investment amount and reflects the new worth of the company.
How Fundraising Rounds Affect Ownership
Fundraising rounds result in the issuance of new shares, which dilute the ownership percentage of existing shareholders, including the founders.
However, the capital raised in exchange for equity is used to grow the business, increasing the overall value of the company. As long as the company grows and increases its valuation, the dilution is offset by the appreciation in the value of each shareholder’s stake.
For example, if a company raises $5 million in a Series A round at a pre-money valuation of $20 million, the post-money valuation will be $25 million.
Investors in the Series A round would then own 20% of the company, while the founders and early investors would see their ownership diluted, but with the potential for greater value as the company grows.
Conclusion
A Fundraising Round is a crucial stage in a startup’s journey, providing the capital needed to fuel growth, scale operations, and achieve long-term success.
Interested in learning more VC related terms? Head over to our VC glossary!