Tech Word of The Week is a weekly series where we look to explain commonly used words in the tech ecosystem in a simple, engaging way.
Scrolling through the streets of Twitterville, you see a tweet with a familiar headline, “XYZ startup raises $XXX in Series B funding.” But what’s with this funding? How do you differentiate seed funding from initial capital? What’s the difference between series A, B, and C roundup?
In this week’s edition of Tech Word For The Week, we are going to examine Seed funding and all the terms used interchangeably with it, such as pre-seed funding, series A round, series B round, etc. Let’s dive right in.
Some tech startups start by bootstrapping (self-financing) their business ideas. They use their own resources to kick things off the ground and probably with support from family and friends. If the business idea is taking off and the customer base starts to grow then they need to expand.
Expansion might entail employing full-time staff, buying an equipment, adding more product features, or building another product infrastructure. These will require financial inputs which the founder (s) might not be able to provide. This is the time for external funds raising.
Fundraising is the process in which startups raise funds externally. In exchange for funds, investors are offered shares in the startup. Investors could be family, friends, angel investors, venture capitals, etc, depending on the seed round.
Now let’s examine each of the fundraising stages and what they entail.
Pre-seed funding: This is the earliest fund founders raise at the beginning of the life cycle of the startup. It is usually provided by family, friends, and investors (who trust or have an ongoing relationship with the founder.)
This round of funding is usually called “the family and friends round.” At this stage of the business idea, there’s a minimum viable product. The founder can hence take a loan from parents, convince friends to bet their savings and investments on. This fund is used to get things running.
Series A Financing : This round is usually the first time founders offer ownership to outside investors. It is provided by venture capitalists, angel investors, accelerators, and incubators.
At this stage, the startup has found a product-market fit, has growing a customer base, and has consistent revenue. This round of funding not only brings external funding, it comes with strategic partners who bring in expertise and valuable experience.
Series B Funding: At this stage, the startup seeks to expand. This series of funds is usually led by a lead investor who invites other investors (angel investors, venture capitals, and later-stage investors) to invest in the startup.
Funds secured here are used to extend market reach, add more product features, consolidate on marketing, advertising, tech, and increase staff strength to meet rising demand. Startups who raise this stage of funding have a track record of satisfied clients, consistent revenue and have proven to investors that they can scale.
Series C Funding: Series C funding usually takes place when the startup has garnered a significant customer base. The startup has also established itself as a leader in its industry. At this stage, investors include hedge funds, private equity firms, large financial secondary market players, etc.
Funds generated here are usually used to enter new markets, acquire another startup, or develop a new product. Because of the startup’s proven history of success and consistent returns on investment then investors are willing to bank on them.
Fundraising is pivotal to every startup and founders must handle it with diligence. There are some basic things that need to be sorted for every stage of funding before thinking of external investors. They include product-market fit, loyal customer base, consistent revenue, and future growth potential. Once these things are sorted, securing investors would be easier.