Funding Rounds

Article byAswathi Jayachandran
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

Funding Rounds Meaning

Funding rounds are the number of times a startup goes back to the market to raise more capital. The goal of every round is for founders to trade equity in their business for the capital they can utilize to advance their companies to the next level.

What are Funding Rounds?

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Every round is created to give entrepreneurs the money they need to grow their businesses to the next level or stage. When startups get enough funding, they can release their vision faster and better. In addition, funding helps to develop operations to progress into a better profitable position.

Key Takeaways

  • Funding rounds are the number of rounds a startup tries to raise money from the market for its growth or expansion.
  • It is also possible for a business to find the money it needs for operations through inbound offers or auctions.
  • The funding stages progress from pre-seed to seed. A Series A, B, and C round of funding is received following that. After that, it can grow to include “n” funding rounds.
  • Typically, there would be a gap of three months between each round of funding. However, it may even expand to nine months in duration.

Funding Rounds For Startups Explained

Funding rounds are the number of times a startup opts to raise capital from the market. In most cases, there may be three or more rounds. A startup may even have inbound offers or auctions through which it may find the funds it needs for operations. However, most seek funding assistance from investment bankers and consultants who can help.

The funding duration can range from as little as three to nine months. There are many steps involved in the startup funding rounds, and they are

#1 – Assemble startup information

Startups need to visualize their business, product, or service stages. This helps the founders elaborate on how much funding is required to operate successfully and move to the next level.

#2 – Research on investors

Startups must be aware of the investors they are about to approach for funding. This helps to create a good impression and understand the type of investments an investor will put their funds into. For example, some investors may be passionate about technology, and some may be passionate about investing in medicine. Funding is dependent on the investor’s aspirations and approaching the appropriate people.

#3 – Create a winning pitch deck and presentation

An excellent idea is not enough. The execution also matters. For the idea to reach the investor successfully, the company must convey it properly. Numbers and statistics help a great deal at this stage. When attractive numbers and a plausible plan are presented before the investors, the idea gets conveyed and will give investors hope that it will translate into reality. However, investors should be realistic in their presentation, as incorrect numbers will do more harm than good.

#4 – Show up to investor meetings and make a pitch

Finding the right environment to pitch in is as important as pitching effectively. Investor meetings are an excellent choice to present the idea and give investors a heads-up regarding the project. Introducing the idea in a short, crisp, captivating manner is a must for founders. In addition, a setting such as investor meetings is an excellent place to foster ideas and receive help to nurture them.

#5 – Fostering relationships

Founders need to meet people and foster relationships. This frequently assists them in developing and sustaining an idea. Help from fellow startup founders or investors can also go a long way. It may not always be funds that come in handy. However, the lessons and experiences gained from success and failure stories also help make an idea a reality.

#6 – Execution of the paperwork

Paperwork has to be initiated and adequately maintained. In addition, the company must follow proper due diligence, following the rules and regulations. Finally, wire transfers and completing the documentation will bring the discussion to a close.

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Types

There are several types or stages of startup funding rounds, and they are listed below:

Stages of Startup Funding Rounds

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#1 – Pre-Seed

The first round of investment mainly comprises funds from friends and family. It is the stage in which the concept is tested, and further investigation into whether it is viable is carried out. It is ideally the founders’ investment, but angel investors may also invest at this stage if investors or their ideas are found promising.

#2 – Seed round

Angel investors, targeted capital, and even incubators may contribute to funding at this stage. These funds are generally utilized for further research, product development, hiring critical personnel, and product-market fit testing. Angel and more prominent seed venture capitalists are the most common seed investors. They are typically willing to make far more significant investments than their micro-seed counterparts. As this is the stage where the idea starts to take form, this stage is riskier as not many startups make it out.

#3 – Series A

Startups that make it to this stage will have gained solid proof of the presented concept or idea. Investors considering investing at this stage often look at the statistical data, i.e., what the startup has achieved with the previous investment. They must be convinced that the startup will reach greater heights with additional funding and be profitable for the money invested. While analyzing the data, investors may not always look for profits, but for the potential it carries and the metrics it has managed to improve.

Funding in this round is focused on optimization. Therefore, an earlier investor may be part of the project again. However, startups typically require much more than initial investments to scale up. Typically, venture capitalists or angel investors invest in Series A. Family offices, private equity firms, hedge funds, and corporate venture arms are other investors who might participate in this fundraising.

#4 – Series B

Series B-round startups look to build further upon the level of success reached in the previous funding rounds. Capital deployment can generally be utilized to scale operations, extend teams geographically into new markets, or plan for acquisitions. Even though the startup may not yet be making much money, it should be able to show that its business strategy is sound and growing. Companies must carefully select investors to move from this stage to enterprise levels.

#5 – Series C or more

Strategic acquisitions will likely be on the table at this stage, and funding is required for them. This could be done for various reasons, including attracting the best people, eliminating competition, accelerating user growth and increasing geographic reach, or bundling several businesses to get ready to sell them off in a buyout.

Startups at this point will be collaborating with the largest venture capital companies, possibly even corporate-level investors. However, for founders, this may also be one of the most challenging rounds. Investors will be considerably more demanding, and founders can anticipate a long, laborious, and rigorous due diligence process considering the startup has seen several funding rounds and tasted success.

#6 – Initial public offering or IPO

An initial public offering or IPO is a stage where the startup decides to raise funds from the public by selling shares directly to the general public.

Example

Let us consider the example of Uber funding rounds. Uber, as a mobility service provider, was a unicorn startup. The company decided to go for a Series G round of funding by issuing shares. With funding from 116 investors, it managed to go through 32 funding rounds and raise a capital of $25.2B.

The company is going on for additional funding rounds even after a vast success because it proliferates. It needs funds to enter new markets, launch new services, and recruit new drivers. In addition, the company needs additional sources to gain a foothold in places where it faces tough competition. The example of Uber’s funding rounds shows us that even a well-established startup may require additional rounds for additional funding.

Frequently Asked Questions (FAQs)

1. How many rounds of funding before the IPO?

The term “funding round” describes the series of funding businesses go through to raise money. For example, a firm in its initial phase goes through as much as three seeding rounds of funding before its IPO.

2. How do funding rounds work?

Investors might invest money throughout fundraising rounds in exchange for equity or a share of profits. Various rounds, known as Series A, B, and C, are made after the original investment, sometimes referred to as seed money. A new valuation is performed every investment round with a new goal.

3. What are the funding rounds called?

The funding stages start from pre-seed and progress to the seed stage. After that, a series of A, B, and C funding rounds come. After that, it can expand to “n” number of funding rounds.

4. How long between funding rounds?

Typically, there would be a gap of three months. However, it may even expand to nine months of duration.

This article has been a guide to Funding Rounds and its meaning. Here, we explain the topic in detail with its process, types, and an example. You may also find some useful articles here –