Funding rounds have had quite a definition change over the past few 5 years as round sizes exploded and new capital entered the startup ecosystem. This is primarily due to the rush of capital entering the private markets looking for outsized returns. Capital that was primarily earmarked for real-estate, public markets and the like began flooding the early-stage venture market creating a mass of competition and inflated market-caps. As in an example, seed & Series A rounds have all doubled in size. In Colorado alone, the average Colorado Series A size doubled between 2016-2020 from $5.9M to $10.5M.
For the sake of clarity, there are caveats to everything – this guide is indicative of the typical startup lifecycle.
Who invests in pre-seed rounds? What is pre-seed funding?
Pre-seed funding happens at the ‘pre-product’ or MVP stage. This type of funding was traditionally a ‘friends & family round’ – completed by founders, angels investors, friends, etc. However, this round has attracted traditional VC firms as investors look to invest earlier and earlier to gain outsized returns & company ownership.
Truth be told, most startups will be hard pressed to raise a sizable VC round at this stage. Sure, there are some caveats within a hot market and founders who have a proven track record but usually the pre-seed round is less than $500,000. The amount raised at the pre-seed stage should provide a decent run rate to build a product and gain some early customer traction.
Think of it as proving out demand before raising a larger round.
What is seed funding?
Seed funding is the first institutional round of financing. In the past, this was a priced round. However, with the popularity of SAFEs and convertible notes, it is more common to structure this round as a SAFE.
For more information on SAFEs, read or watch our breakdown on SAFEs vs convertible notes vs priced rounds.
Who invests in seed funding rounds?
Startups raise seed rounds from a few types of investors:
- angel investors and strategic investors
- early-stage venture capital firms
- corporate venture capital firms within an adjacent sector
- accelerators
- micro-vcs
A note on corporate VC firms: Corporate vc firms can help you bring your product to market fast by giving you direct introductions to the decision makers within your segment. However, some have a reputation for stealing ideas and taking those ideas to market themselves. I don’t have any 1st hand experiences with this but worth noting.
A note on equity: Accelerators typically take an outsized amount of equity but can help you set the business foundation & tee up the introductions that may allow you to progress and raise a round from a VC firm. Be sure to vet the accelerator for quality and reputation – we recommend asking for founder recommendations and checking the success metrics. Here’s a longer resource on what to know before handing over equity to an accelerator.
How much money is involved in seed funding? How much should I raise for my seed round?
Seed rounds have grown over the past decade and are dependent on the region, sector and the founding team. Rounds are ballooning to unprecedented rates but that doesn’t mean it is necessarily wise. If you are trying to decide how much to raise, look at your run rate and make an educated financial decision. Weigh your sector, the competitive landscape, and how fast you can go-to-market without reducing your equity pool. At the end of the day, you want your round & valuation to be achievable and to set you up for success – not an out-of-reach figure or valuation.
What is Series A funding round?
Series A funding is led by venture capitalists, and priced by the lead investor. This round entails more due diligence than prior rounds – logically so, there is more supporting data since the business has been in operation and has acquired customer data. Diligence includes customer interviews, reviewing product usage, product demos, user growth and checking if the business model is sound.
For the full checklist for preparing for due diligence & what to expect, check out our due diligence guide.
Series A funding requires a lot of work and time before the money comes in. Companies must present what growth they’ve achieved with prior funding rounds and demonstrate they have a qualified leadership team to back.
The goal is to get a lead investor to price the round and bring in other investors. This makes the negotiation process simpler as you’re only negotiating with one investor / VC firm. Syndicating the round is also an option. If you can’t nail down a lead investor, you can pull together a group of interested investors to fill the round. As indicated by this YC blog, there really is a domino effect with investors. If you can get a lead, more checks will follow.
How much money is involved in a Series A funding round?
Like seed funding, Series A rounds are a broad range. According to Crunchbase, over the past decade, “the average global Series A round increased from less than $6 million to more than $18 million.” But the same guidelines hold true for a Series A round as a seed round: there is a fine balance between raising too much and too little. Evaluate your business model to understand how much cash you need to attack your market and how much you need to properly scale your team. Scaling too fast often breaks companies and results in team turn-over. Scaling too slow you risk losing momentum and being unable to attract top talent.
