Stages of Venture Capital Financing

It is quite common to hear that this or that startup has raised so many million dollars through a Series A or B round. In this article we will explain why the various stages of venture capital financing are...

Many technology companies, including large corporations, have developed from small startups, who shared their idea with investors and received initial funding for development. Venture financing involves a high-risk, and most startups fail. To minimize their risks, investors usually do not give large amounts of money at once, but support companies through separate rounds of financing. Each subsequent stage is less profitable than the previous one.

Startups that do shoot up after the initial investment receive investor support for further development.

At each financing stage, the investors are issued securities corresponding to the relevant round. If the company goes public, such securities can be exchanged for regular shares.

Seed Round

The seed round is one of the riskiest stages of financing, where a startup usually cannot show a finished product or service to investors. Entrepreneurs explain the idea for their business, propose prototypes and development models, and investors put a small amount of money (usually between 25 thousand to 1 million dollars) into the project

The investments raised through «seeding» are normally used to implement and refine the product, conduct market research and hire specialists for the startup team.

Seed capital ensures that investors get an equity stake in the business and the startup founders get financing until monetization channels are in place.

As part of the seed round, a startup can, in particular, raise investments from family and friends (bootstrapping), business angels (see below) and use crowdfunding.

Venture funds that supported the project during the seed round can continue participating in further stages of fund raising and business scale-up.

Angel Round

At this stage, investment volumes usually do not exceed $1 million. This round is special in that angel investors provide considerable assistance in organizing the business, and financial support sometimes takes second billing.

This investment option is particularly important for startups, as they do not yet have any practical business experience. The angel round is sometimes combined with the seed one.

Series A

If a startup managed to survive and show growth potential after the seed round, investors support it with bigger investments.

This stage is intended to boost the development of the company within a short period of time — normally up to two years. A company that manages to raise Series A round financing usually gets major coverage in the business press.

During Series A round, a company may raise from $2 to $10 million in exchange for 10–30% of its shares. The new capital injections help the company develop its product and infrastructure, hire more employees and set up stable business operations.

Series B

The next level of financing is intended to increase the company’s growth, scale up its business model and capture new markets.

At this stage, companies’ financing requirement is over $ 1 million and the investors receive Series B securities.

Once Series B Round has been completed, investors expect the company to attain its target parameters, increase profits, expand in its current market and enter new ones.

If the company needs additional financing at this stage, this round sometimes includes Series А’ and В’ sub-rounds.

Preliminary financing, for instance, for a less costly growth is marked АА, ВВ, etc.

Series C

The financing volume at C stage starts from $1 million. A company usually becomes profitable at this stage and does not need third party support any more.

Additional fund raising rounds are announced if the company failed to achieve its goals at the preceding stages.