The Startup Funding Lifecycle – From Pre-Seed to Liquidity Event
So you’re thinking about investing— this is exciting!
Whatever the venture you decide to pursue, this is quite the moment for you. Money’s at stake and you can gain some legitimate capital here if everything plays out as expected.
But, wait, what impact can previous funding rounds have on the liquidity event?
Who else can you expect to be involved in the startup by now?
And what does it all mean for you?
No worries! Below, we’ll explore the lifecycle of a startup and what each stage means for you as an investor.
Back to Basics: Venture Funding
But first, let’s start with revisiting the idea of venture funding.
Venture funding is a type of private financing for startup companies and small businesses looking to expand their business operations.
What’s noteworthy: Venture funding can come in one of two forms: monetary contributions or human capital— both are in exchange for a share of the potential growth of the company.
Funding Rounds: The Startup Life Cycle
There are about 5 funding rounds in the startup life cycle: pre-seed, seed funding, series A, B, C+, and the liquidity event.
However, there are always cases of startups reaching a liquidity event earlier or later in the proverbial funding pipeline— nevertheless, let’s get familiar with the various funding rounds, from pre-seed to series C and beyond!
1. Pre-Seed: Founders, Friends and Family
When startup founders are trying to get their company off the ground, they will typically engage in what’s often referred to as “bootstrapping”, or contributing their own capital to fund the initial operations of the company.
While the traditional way to raise funds at this stage is a F&F (friends and family) round, there are also venture capital firms dedicated to pre-seed funding, as well as different forms of crowdfunding – from either accredited investors or consumers.
What’s noteworthy: Many scenarios can be considered as pre-seed funding. In many cases, this round will be raised using an investment vehicle like a SAFE or a Convertible Note to avoid setting a valuation this early in the startup’s life.
2. Seed Funding / Angel Investing
Seed funding is the first official equity funding stage and typically contributes to the completion of market research and product development.
There are several players in the seed funding stage:
- The founders
- Friends and family – investors to whom the founders may have easy access.
They might not be professional investors or have a vast understanding of startup finances.
- Angel investors – usually these are high net-worth individuals that are passionate about startups.
The amount of investing experience and knowledge they possess may vary.
- Venture capitalists – these are professional investors who are often partners in venture capital firms.
They’ve raised funds from Limited Partners in order to invest in startups that fit their investment hypothesis – so they have a clear agenda of the startup stage and vertical they’re looking to fund.
What’s noteworthy: Seed funding terms vary by startup but it is not uncommon for startups at this stage to raise anywhere between $10,000 to $2 million dollars.
3. Early Stage: Series A and B
From this point on, it’s time to grow!
To do this, startups will raise anywhere from $2 million from established venture capital firms as part of their Series A.
What’s noteworthy: The average Series A funding round size is always changing. In 2020, it was $15.6 million dollars.
The promising startup must meet the growing demand it has generated. To meet both sales and operational goals, the team will need the funds for quality talent acquisition.
This is exciting! This means the startup has proven its business strategy through customers and revenue, and so, Series B funding typically takes place.
What’s noteworthy: The average Series B funding round is estimated to be around $33 million dollars.
4. Growth Stage: Series C+
We’re now in the big leagues! Series C is all about scale and includes players such as hedge funds, investment banks, and private equity firms in addition to the previously included venture capital firms that have participated in previous rounds.
What’s noteworthy: Many times, late stage funding rounds are utilized to boost valuations in anticipation of a potential liquidity event like an Initial Public Offering.
5. Liquidity Events
The long awaited liquidity event, finally!
A liquidity event is exciting as it is typically the end goal of startup founders and their venture capitalist partners.
It means that the previously non-traded, private company may now have a platform to convert their illiquid equity into cash through an IPO or direct acquisition.
Yes! We’re talking money!
What’s noteworthy: While the venture funding lifecycle can span several years, sometimes over a decade before a liquidity event takes place, the space continues to grow of startups needing/seeking funding and venture capitalists seeking investments.
Startups come in many shapes and forms. Some will reach a liquidity event after their Series B and some will prefer to build their business and product over multiple stages – even raising a Series G before they choose to go public, for example.
Of course, much of this also depends on market trends and opportunities!
This is why it’s so important to understand the different stages, get acquainted with the terms, and key players involved.
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