Series A, B and C Funding

What Is Series A, B, and C Funding? 

Series A, B, and C funding represent distinct rounds of capital investment that typically follow Seed funding and Angel investing. These rounds allow new external investors to inject cash into a growing company in exchange for equity or partial ownership. Each funding round is a separate occurrence, and the terms refer to the series of stock issued by the capital-seeking company. 

At the series A and B stages, company development is focused on revenue generation, customer acquisition company infrastructure development. The investor profile is typically angel investors, family offices, and early-stage VC funds.  

At the series C and beyond stage with company development, we see growth, scaling, and profitability. And the investor profile is family offices, later stage VC funds and venture debt capital lenders. 

Institutional Investing and the Role of Venture Capital 

Series A is often referred to as a startup’s first institutional round which is the point where VC funds look at the investment opportunity. Some VC funds will structure a primary series A fund and specifically carve out a smaller opportunistic or seed extension fund, but these are not the norm. Another recent development has been the formation of seed funds, which is like an institutional VC fund targeting seed stage investments.  

How Series A, B, and C Funding Rounds Work 

This chart is useful in understanding the correlation between a startup company’s evolution through the various stages and the cashflow expectations from investors at the various stages 

Pre-Seed to Seed Stages 

The primary goal or purpose of the pre-seed to seed stages of a startup company is to take an idea or concept, introduce it into the market, and through multiple iterations or refinements, ultimately validate the business model or proof of concept as it is sometimes referred to. This is the very first step in creating a company with a new product or service. 

Pre-Seed Funding 

At the pre-seed stage, company development involves concept development, product or service, prototype development and beta testing. The investor profile typically includes friends and family angels, bootstrapping founders, incubators, grants and other non-dilutive investments. Very early-stage equity investments are required as the company will not have sufficient credentials to enable it to get debt financing from traditional sources. 

Seed and Seed Plus Funding  

At the seed and seed plus stages, company development sees proof of concept user testing, product or service validation and business planning. The investor profile includes angels, family offices, seed funds, accelerators, and corporate venture capital. 

How Series A Funding Works 

The stage after seed is series A and B, also known as the early-stage rounds of capital. The goals of Series A funding include fuelling growth through expanding operations to capture more market share. At this stage the business will benefit from hiring new talent and scaling to create new departments such as sales teams, marketing or central office support. In addition, product development will continue, usually by enhancing products or services which will likely come from the additional team members and any capital spending on production.  

What are the Benefits and Drawbacks of Series A Funding? 

The overall target for Series A investment will typically be market penetration and reaching a broader customer base. The external investment will accelerate planned company growth and allow for faster expansion than relying on organic growth and internal investment. The drawback for founders is that it requires sharing company equity to achieve this. It is worth noting, that Series A funding preparation will also include preparing and laying the groundwork for subsequent funding rounds, starting with Series B. 

How Series B Funding Works 

Series B is the second round of funding that takes a business past the development stage. The company may not yet be profitable but should have strong revenue growth and gross profit margins. Robust sales, both from existing customers as well as attracting new customers will be KPIs at this stage.  

What are the Benefits and Drawbacks of Series B Funding? 

Series B funding will further dilute the founders’ shareholding but will continue to accelerate the sales growth within the company and allow it to focus on maintaining existing customers as well as rapidly expanding to garner more sales. This additional funding should allow the company to move into a profitable business model as robust sales can be transformed into profits. 

How Series C Funding Works 

The Series C and beyond stages are later stage rounds of investment, which focus on companies that are growing steadily and rapidly scaling their business model with new products or in new markets, and one that is on the trajectory for an IPO or strategic sale. 

What are the Benefits and Drawbacks of Series C Funding? 

Reaching profitability without sacrificing product quality and revenue growth is the main goal for companies in later stages. Institutional investors will also be working with the company to prepare for an exit such as an IPO or strategic sale and evaluating the timing of a potential exit.  

The drawback at this stage is perhaps that further investment isn’t necessarily required as the company can be profitable. However, it will accelerate the business growth again ahead of organic investment particularly if the company is only generating a small amount of profits. Relying on reinvesting in the company can be time-consuming and run the risk of allowing new competitors into the market space before the incumbent new business has acquired a dominant market share.  

The other potential benefit is that it allows new investors into the company who may have more relevant expertise with the business model. This experience and knowledge can help further expansion of the company, particularly if an exit strategy is being implemented.  

What Role Does Valuation play in Funding Rounds? 

It can be difficult to value an early-stage company as there isn’t usually much historic financial performance to analyze or to base a valuation on. Companies can be considered illiquid and therefore hard to value. Early-stage investing is considered a long-term investment, largely due to the time it takes to grow the company and achieve an exit. 

The initial capital investment is used to make improvements to the company made, whether it’s creating a new software platform or expanding distribution. Then hopefully sales and then profit will be successfully driven from this adding scale and value to the overall company. Completion of this should improve the company valuation and create metrics such as revenue multiples (and possibly EBIT or operating profit multiples) to allow analysis of overall performance. 

When an institutional fund makes an equity investment through a round of capital, there is an implied valuation of the company. However, it remains illiquid until the company has an exit, for example, an IPO or strategic sale. At that time, the company receives a market valuation, and the investment funds receive a return on their investment. 

Valuation plays a critical role in funding rounds. Key factors include market size (the dollar value of the business’s market), market share (the proportion of the overall market occupied by the business), revenue (estimated company earnings calculated as market size multiplied by market share), multiple (used by investors to estimate business value, e.g., 10x or 12x revenue), and return (the percentage increase in value relative to the initial investment). 

Conclusion 

Series A, B, and C funding are key steps for a startup’s growth, each with its own goal. Series A helps startups grow and improve their products, Series B focuses on increasing the company’s earnings, and Series C aims at making the company bigger and ready for big moves like selling the company or going public. These funding rounds show how a company grows over time and attract different kinds of investors at each stage. Knowing about these funding rounds is important for business owners to help their company grow and work well with investors. 

Identify the characteristics of venture capital investing, the various ‘value-add’ propositions a VC fund can offer, the typical evolution of growth by stage or round of capital from pre-seed to later stages, and the link with risk with the What is a VC Fund playlist in Felix. Or enrol on the Venture Capital Associate Micro Degree.