Confused about the jargon used in the capital raising process when you see terms such as Series A, Angel Investors and Seed funding? Do not worry because you are not alone. Unless you have had personal experience with capital raising, it can be a complicated and confusing process. This guide will break down the various stages and terms involved in the capital raising process.
The Funding Process
The funding process works by investors providing money to the startup in exchange for equity in the business. Before each of the rounds commences, a valuation of the business is released. The valuations are calculated based on management, the proven track record of the company including product offerings and customer base, market size and associated risk with the startup.
Seed Round and Angel Funding
The Seed round is often the first step of capital raising where entrepreneurs will go outside family and friends to obtain funds for their business. The funds raised will be used to cover business expenses, build and launch early products and allow the business to gain traction until the company can start earning revenue. It is during this stage that a startup may attract an angel investor which are individual investors with a high-net worth that inject capital in exchange for equity in the business. A more detailed breakdown of Angel Investors can be found in our previous guide.
Once the business has an established track record, it may attempt to raise capital through Series A round. It is during this round where shares are offered to external investors for the first time in exchange for equity in the business. By the time a startup reaches this stage, they will have developed a business model with the aim of generating long-term profit. The startup will also have an established user base and product by this stage. The investors involved here often include professional angel investors, venture funds and venture capitalists.
Series B capital raising is similar to Series A. However, the focus with this round is raising funds for building and scaling the business. By this stage, the business model is established, and traction is occurring with their customers. A common goal here is for the startup to not only break-even but to achieve a net profit. The investors involved in Series B are similar to Series A, but this stage often includes Venture Capitalists with a focus on later-stage growth.
Series C, D, E and onwards
Subsequent rounds of capital raising will be used by a company if they are attempting to increase the business’s market share, expand operations internationally, planning to undertake mergers and acquisitions of other firms, and continuing to develop products and services. By this stage, the company is established, and therefore more investors will be willing to provide capital. Often this means that hedge funds, investment banks and private equity firms may provide funds during this round.
While Series funding allows startups to obtain capital to develop and grow their business idea, having an understanding of the processes involved in raising the required capital will be critical for any entrepreneur looking to obtain funding successfully.
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