The A, B, and C's of Funding
In a world dominated by jargon, someone clearly forgot to put the fun in FUNding.
There are different sources a startup can raise money from. They could bootstrap- which means use their own funds or borrow from friends and family, or they could get outside their own network and raise money through investors and venture capitalists.
Usually, businesses take the second course. Venture capitalists and investors are people and companies who are in the business of funding startups. These parties profit off ideas that take off by sharing profits over the long term.
Funding can seem like an overwhelming and complex process for entrepreneurs with limited knowledge of finance.
In this piece, we break down the ins and outs of the various kind of funding and how they differ from each other. By the end of this article, you should be able to understand the fundamentals of funding, decide what stage your business is at, and what kind of funding might work for you.
Funding in the current startup ecosystem goes through three phases:
Pre-seed funding is the earliest stage funding a startup can get. This is primarily for idea-stage startups. This funding includes, but is not limited to bootstrapping. The various sources a startup can expect in the pre-seed stage are friends and family, business incubators, angel investors, and their own funds.
During this stage, the startup is usually just an idea that has been solidified on paper with a business plan and a rough sketch of what the future might (emphasis on might) look like. At this stage, the founder is either working solo or with ateam to do the groundwork.
Seed funding is the very first “official” funding a startup may go on to raise.
This is the initial funding a business may get for a stake and equity. It involves angel investors, early-stage investors, and business accelerators.
This money is primarily used to build the foundation of a startup, hire core talent, and for market research.
This funding can range from a few thousand dollars up to $2 million, depending on the source of funds and scalability of the business.
Recently, waste management and recycling startup based out of Hyderabad- Recykal has raised $2 million in a Seed Funding.
Funding rounds are series that a startup goes through to raise capital for different goals at different stages of a business.
These rounds can be bifurcated on the basis of the stage a business is in and are usually named “Series A”, “Series B” etc.
Series A Funding is the first investment a startup may get once they have crossed the seed stage. At this stage, the business has started to garner early traction, has an MVP, and has started to understand the product/market mix better.
The money raised here is used to capitalise the business idea, develop and finalise products, conduct additional market research, initiate marketing and branding for the startup, and hire initial employees.
The average Series A funding has risen considerably over the years. Now, it averages to anything between $2million to $7 million but can be higher depending on the current standing and prospect of the business. Companies can expect to be valued anything between $5 million to $10 million.
The traction can be in any quantifiable term such as revenue, views, or other key performance indicators (KPIs).
The primary players in this round are venture capitalists and “super” angels. In fact, this is usually the first round in which a VC might even get involved.
During this stage, a startup is expected to have a business model in place, a plan for scalability, and a plan to increase the revenue.
Last year, Avail Finance, a Bengaluru based startup raised $17.2 million in a Series A funding. Led by co-founder and CEO of Ola, this startup raised funds from Matix Partners.
Series B Funding comes when a startup has built its core team and has its first set of customers. Now, it needs to expand further.
This is usually after they have found their product/market mix and are ready to put their scalability plan into execution.
The average ticket size of a Series B funding can range from $7 million to $10 million (can be higher) and the valuation can be expected to reach $30 million in some cases.
A Series B funding usually comes from the same VCs from the Series A funding or late-stage VCs. A promising idea requires consistently hiring new talent and expanding to serve an expanding customer base.
Scalability and taking the business to the next level are core to Series B funding. Typically, a business has to achieve significant milestones before going for this funding.
The primary use of Series B funds is to add on to the existing value and take the business further by expanding the customer base with the help of deeper market analysis, focusing on revenue generation, creating intellectual property, and more.
BharatPe, a FinTech startup based out of New Delhi raised $15.5 million in April 2019 from Insight Partners, Sequoia, and Beenext.
Companies that do well and are able to achieve success in their industries make it to a Series C Funding. In this stage, the focus of a startup is to take their products to international markets.
The funds may be used to develop new products and technology, acquire greater market share, or even increase valuation before going public.
Most companies do not go beyond Series C funding and try to initiate an IPO or acquisition after this.
Although some companies may go beyond to a Series D, Series E, and beyond- most companies use Series C as a final push before being listed on a Stock Exchange or getting acquired by multi-billion dollar ventures.
A company that has reached Series C is already valued highly. It can expect to raise anything between $50 million to $120 million depending on the goals, vision, and projected plans of expansion.
You may have heard, NoBroker, a real estate eCommerce startup based out of Bengaluru raised $51 million in a Series C funding recently.
This funding was led by General Atlantic and has brought the valuation of this company to $71 million.
Out of the total funding raised in 2018, the graph below shows how much of it was raised by late-stage startups (i.e. Series C)
In conclusion, all “Series” of fundings are simple to understand. A is to get Accustomed to the business world. B is to Build. Lastly, C is to Create a legacy.