The founder's guide to startup series funding rounds

What are startup series funding rounds?

A startup series funding round is a process through which companies raise capital from investors to fuel their growth and development. 

A startup usually begins with seed funding and potentially moves through Series A, B, C, and beyond. Let’s review each of these.

• Pre-seed funding helps startups move from idea to a more concrete stage of development.
• Seed funding is used to raise initial capital to get off the ground. 
• Series A funding helps startups optimize their product and user base (after demonstrating some traction). 
• Series B funding focuses on scaling the business and expanding market reach.
• Series C funding is generally for well-established companies looking to expand further, develop new products, or prepare for an IPO or acquisition.

We'll go over each of these in more detail below.

How do investors evaluate companies?

When evaluating startups, investors typically consider the following factors: 

• The management team’s experience, skills, and vision; 
• The growth potential of the market to understand the startup's scalability; 
• The product or service for its ability to solve customer problems; 
• Its competitive advantage and differentiation; the startup’s business model; 
• Lastly, measurable progress indicators, such as customer adoption and revenue growth.

Pre-seed funding

Fast facts of a typical pre-seed company profile

• ‍Revenue: Pre-revenue or early revenue stage‍
• Team: Strong founders team‍
• Investors: Friends and family, angel investors, pre-seed venture capital firms, incubators/accelerators‍
• Goals: Develop product, conduct market research

How pre-seed funding works

Pre-seed funding is typically the earliest stage of the startup funding process. The company is still in its conceptual phase or has just begun developing its product or service. 

This stage of funding is designed to provide the startup with initial capital to move from idea to a more concrete stage of development. Founders usually seek pre-seed funding to cover early expenses such as market research, product development, hiring initial team members, and preparing for future funding rounds.

The amount raised in pre-seed rounds is generally smaller compared to later stages. Investors at this stage often include friends and family, angel investors, early-stage venture capital firms, and sometimes specialized pre-seed funds or accelerators. 

In exchange for their investment, these early backers usually receive equity in the company, often through instruments like convertible notes or SAFEs (Simple Agreement for Future Equity) rather than priced equity rounds.

What makes pre-seed funding stand out from later rounds?

Pre-seed funding can be less formal than later rounds, with less extensive due diligence required. Don’t be fooled by the lack of formality, though, as investors still look for promising ideas, strong founding teams, and potential for significant market impact. 

The funding is typically meant to last 6-12 months, and the startup is expected to achieve key milestones for a seed round. These milestones could include developing a minimum viable product (MVP), gaining initial user traction, or validating key business assumptions. 

Overall, pre-seed funding plays a crucial role in helping very early-stage startups bridge the gap between initial concept and a more developed business ready for larger investments.

Limitations or challenges of the pre-seed round

One of the primary hurdles of pre-seed funding rounds is the limited funding typically available, which may not be sufficient for some startups to achieve meaningful milestones. 

The competitive landscape for pre-seed funding is intense, with many startups vying for limited capital, ranging from $30,000 to $2 million. 

This stage often requires founders to give up a substantial equity stake (5-20%), diluting their ownership. Furthermore, valuation can be particularly tricky at this stage, leading to potential disagreements with investors. 

Because companies typically don’t have a proven product or track record at this stage yet, investors find the pre-seed round to be a high-risk investment. Early-stage founders also struggle with a limited network of potential investors. 

Another big limitation during this stage is the short cash runway, putting immense pressure on the team to achieve quick results. 

Seed round

Fast facts of a typical seed-round company profile

• ‍Revenue: Early revenue stage but not required‍
• Team: Strong founding team in place; beginning to build out key roles‍
• Investors: Angel investors, early-stage VCs, and incubators‍
• Goals: Develop/optimize product and develop clear path to monetization

How seed round funding works

Seed round funding is typically the first significant round of external investment for early-stage startups. It usually happens after a company has developed beyond the initial idea stage and has some form of prototype or MVP (but before it has achieved significant market traction or revenue). 

In this round, startups aim to raise capital from professional investors, often including seed-stage VCs, angel investors, and specialized seed funds.

The amount raised in a seed round varies widely, from $500,000 to $2 million, with valuations often between $4 million to $20 million. Startups usually offer between 10% to 25% ownership. 

The funding is used to further develop the product, hire key team members, conduct market research, and prepare for larger-scale operations and future funding rounds.

Seed rounds are often less formal than later funding stages, as many deals are structured using convertible notes or SAFEs rather than priced equity rounds. 

Successful seed funding validates the startup's potential and can open doors to further growth opportunities and future funding rounds.

Limitations of seed round funding

One of the primary constraints with seed round funding is the limited amount of capital that is typically available at this stage, which may not be sufficient for startups with initial high costs. 

As with the previous stages, this funding stage also often requires founders to give up a substantial equity stake, potentially diluting their ownership and control even more. Founders also struggle with the challenge of finding startup investors, making it difficult to secure meetings and pitch opportunities. 

Valuation can be particularly tricky at this stage, too, leading to potential disagreements with investors and impacting future funding rounds. 

As with pre-seed funding, the short cash runway provided by seed funding (often 6-12 months) puts immense pressure on the team to achieve milestones. To add to this challenge, inexperienced or beginner founding teams can struggle with product development, market positioning, and financial management. 

Series A

Fast facts of a typical Series A company profile

• ‍Revenue: Monthly recurring revenue (MRR): $50,000-$100,000‍
• Team: Strong founding team and some key roles; ready for team expansion‍
• Investors: Traditional VCs‍
• Goals: Develop business model for long-term profit, scale operations, and prepare for Series B

How Series A funding works

In this round, startups seek larger investments, often ranging from $2 million to $15 million, primarily from traditional venture capital firms and sometimes angel investors. These startups have shown growth potential and developed beyond the initial idea stage. 

What does the Series A fundraising process look like?

The process involves the startup presenting a detailed business plan and growth strategy to potential investors, usually through pitch meetings and a comprehensive pitch deck. Investors evaluate the company's potential based on the market size, product-market fit, team quality, and growth metrics. 

If interested, investors offer term sheets outlining the proposed investment amount and conditions. Series A investors typically receive preferred stock in the company, which comes with privileges such as liquidation preferences or board seats. 

The funding raised in a Series A round is generally used to further develop the product, scale operations, hire key personnel, and expand market reach. This round marks a transition point where the company's valuation is more formally established, and the startup begins to build a more structured business operation. 

Successfully closing a Series A round not only provides necessary capital but also establishes the startup's potential.

Limitations or challenges of the Series A round

There are always pros and cons to seed funding; and, there’s always an opportunity cost. While it’s a crucial milestone for many startups, Series A funding comes with several significant challenges and limitations. 

One of the main blockages is the intense competition for capital. Many startups struggle to meet the expectations from founders, leading to what's known as the "Series A crunch," where a significant number of seed-funded companies fail to raise a Series A round. 

Raising Series A funding can be extremely time-consuming. Furthermore, founders risk trying to please VCs versus focusing on building real business value. Adding to the challenge, once founders secure Series A, the pressure to achieve rapid growth can lead to premature scaling. 

In terms of equity, the larger amounts of capital involved in Series A rounds often come with stringent terms, greater equity dilution for founders, and additional board seats, potentially reducing the founders’ control over the company. 

Lastly, the increased scrutiny and reporting requirements that come with Series A funding can be challenging and require more sophisticated financial and operational systems.

Series B

Fast facts of a typical Series B company profile

• ‍Revenue: Stable revenue growth; pre-money valuation at around $40 million‍
• Team: Formal leadership team, sales team, professional team across departments and an expanding team‍
• Investors: VCs and private equity firms‍
• Goals: Scale operations significantly and market expansion

How Series B funding works

In a Series B round, startups typically seek larger investments, often ranging from $10 million to $30 million or more, primarily from VCs, private equity firms, and sometimes investors who participated in earlier rounds.

As with Series A, the process involves the startup presenting a detailed business plan and growth strategy to potential investors, usually through pitch meetings and a comprehensive pitch deck. 

Investors evaluate the company's potential. If interested, they may offer term sheets outlining the proposed investment amount and conditions. In exchange for their investment, Series B investors typically receive preferred stock in the company, which often comes with certain privileges such as liquidation preferences or board seats.

The funding is generally used to scale operations significantly, expand into new markets, hire key personnel, and optimize product offerings. This round also often marks a transition point during which the startup begins to build a more structured business operation, with a focus on rapid growth and market expansion. 

Limitations or challenges of the Series B round

The key differences between Series A funding and Series B is that Series A is more about potential, while Series B is about proven results. Series B investors have even higher expectations for traction and revenue. Series B requires more detailed financials and metrics and focuses more on scalability and market dominance.

Series B has its unique challenges. Investors expect tangible proof of growth and success, including significant traction, revenue growth, and a clear path to profitability. Investors also expect robust financial metrics and projections. 

VCs and private equity investors are also seeking evidence the business model works at scale, scrutinizing past performance and execution ability. In terms of equity, investors usually get 15-30%. 

Series C

Fast facts of a typical Series C company profile

• ‍Revenue: Strong, established revenue streams and proven profitability (or clear path to profitability)‍
• Team: Well-established leadership team and employee base; ready for global expansion‍
• Investors: Hedge funds, private equity firms, investment banks, late-stage VCs, and large institutional investors‍
• Goals: Global expansion, market dominance, and/or prepare for an IPO

How Series C funding works

Series C funding usually occurs after a company has successfully used its seed, Series A, and Series B funding to develop a viable product or service, generated substantial revenue, and built a strong customer base. 

In a Series C round, companies seek larger investments, often ranging from $30 million to $100 million or more, primarily from venture capital firms, large financial institutions (e.g., investment banks and hedge funds), and sometimes from previous investors.

The process involves the company presenting a detailed business plan and growth strategy to potential investors, usually through pitch meetings and a comprehensive pitch deck. Investors evaluate the company's potential based on factors such as market position, revenue growth, profitability, and scalability. 

If interested, they may offer term sheets outlining the proposed investment amount and conditions. Series C investors typically receive preferred stock in the company, which often comes with certain privileges such as liquidation preferences or board seats.

The funding raised in a Series C round is generally used for significant expansion efforts such as entering new markets, research and development, or acquiring other companies. 

This round often marks a transition point where the company prepares for potential public offerings or major liquidity events.

Limitations or challenges of the Series C round

In addition to the limitations faced in previous funding rounds, including equity dilution and less control, the pressure to achieve rapid growth and global expansion is heightened, with companies expected to hit ambitious milestones quickly to justify their often high valuations. 

Series D and beyond (pre-IPO)

Fast facts of a typical pre-IPO company profile

• ‍Revenue: Established revenue streams with strong growth; valuation typically at around $500+ million‍
• Team: Well-established leadership team, experienced executive team, specialized departments, and a scaling operations team‍
• Investors: Hedge funds, private equity firms, investment banks, late-stage VCs, and large institutional investors‍
• Goals: Prepare for an IPO (e.g., boost valuation, meet regulatory requirements for public listing, and strategic acquisitions)

How pre-IPO funding works

Pre-IPO funding typically works as a form of private investment in a company before it goes public through an Initial Public Offering (IPO). 

The process involves the company offering these shares through private placements. Investors conduct thorough due diligence on the company's financials, growth prospects, and market position before committing to the investment. 

In exchange for taking on the risk of investing in a company that hasn't yet gone public, these investors typically receive shares at a lower price than what is anticipated for the IPO. 

This arrangement benefits the company by providing additional capital to fund operations, cover IPO-related expenses, and improve its financial position before going public. It also helps the company establish relationships with key institutional investors and potentially increase investor confidence in the upcoming IPO. 

Limitations or challenges of pre-IPO funding

Pre-IPO investments often come with restrictions, such as lock-up periods that prevent investors from selling their shares immediately after the IPO, ensuring some stability in the stock price during the initial public trading period.

This illiquidity can pose challenges for investors who may need to access their capital in the short term. Additionally, there's a high degree of risk and volatility associated with pre-IPO investments, as there's no guarantee of a company's post-IPO performance, and in some cases, planned public offerings may not materialize at all. 

The limited transparency in private companies compared to public ones creates information asymmetry, making it difficult for investors to fully assess the company's financial health and prospects.

Valuation complexity is another significant challenge, as pre-IPO company valuations can vary widely and may not accurately reflect the company's true value. For individual investors, high investment minimums and accreditation requirements can limit accessibility to pre-IPO opportunities. 

As with previous funding rounds, the pressure on companies to achieve rapid growth and meet high expectations after receiving pre-IPO funding can lead to premature scaling and potential missteps. 

Lastly, regulatory considerations and potential changes in U.S. Securities and Exchange Commission (SEC) rules add another layer of complexity and uncertainty to pre-IPO investments. These challenges underscore the importance of thorough due diligence, risk assessment, and seeking expert guidance when considering pre-IPO investments.

Alternatives to startup series funding

While startup series funding is a well-known path for raising capital, there are several alternatives that entrepreneurs can consider when looking to finding your ideal investor. 

• Bootstrapping is one option, where founders use their own resources and reinvest early profits to grow the business, maintaining full control and charting their own course (though perhaps at a slower speed). 
• Friends and family rounds can provide initial capital with more flexible terms than traditional investors. 
• Crowdfunding is the process of raising money from a large number of small investors, often in exchange for early product access or other perks. 
• Angel investors can provide capital along with valuable mentorship and industry connections. 
• Incubators and accelerators offer not just funding but also resources, mentorship, and networking opportunities in exchange for equity. 
• Government grants and small business loans can provide non-dilutive capital, though they often come with specific requirements or limitations. 
• Revenue-based financing allows companies to receive capital in exchange for a percentage of future revenue, avoiding equity dilution. 
• Venture debt can be an option for startups with some traction, providing loans that may convert to equity. 
• Some startups also explore corporate partnerships or strategic investments from larger companies in their industry. 

Of course, each of these alternatives has its own advantages and challenges. 

Startup series funding example

Let’s come up with a fictitious startup called AInnovate Now, founded by two college friends, Anna and Rick. AInnovate Now is an AI-powered app that helps you innovate old ideas. 

Anna and Rick begin by bootstrapping, using their savings and a small family loan to develop a prototype. 

Encouraged by early user feedback, they secure $500,000 in seed funding from an angel investor, allowing them to refine their product and launch a beta version. 

As user adoption grows, Anna and Rick raise $5 million in Series A funding from a VC firm, using the capital to expand their team and marketing efforts. 

Within 18 months, the app gains significant traction, prompting a $20 million Series B round led by a prominent VC firm. This funding helps AInnovate Now scale operations, enhance features, and expand into new markets. 

Two years later, with a solid user base and growing revenue, AInnovate Now secures $50 million in Series C funding from institutional investors. This round values the company at $500 million and provides capital for international expansion and potential acquisitions. 

Throughout this journey, AInnovate Now's founders, Anna and Rick, see their ownership diluted but retain significant stakes as the company's value skyrockets. This is a fairly typical progression in a successful startup series funding.

FAQs about startup series funding rounds

How many rounds of funding do most startups raise before an IPO?

On average, a startup might go through four to five funding rounds of funding before reaching an IPO. However, not all startups follow this exact path, and some exit through acquisition rather than an IPO. 

How do I get Series A funding for my startup?

To secure Series A funding for your startup, you'll need to demonstrate significant traction, a strong product-market fit, and clear potential for scalability. Make sure your startup has an MVP with proven customer demand and a clear path to profitability. Also, build a solid team with relevant expertise and a track record of success. Lastly, develop a comprehensive business plan and a compelling pitch deck. Most importantly, network, network, network to fundraise.

What is startup series funding?

Startup series funding refers to the process of raising capital for a startup company through successive rounds of investment, typically labeled as seed, Series A, Series B, Series C, and further rounds. This progression allows startups to secure larger amounts of capital as they scale and prove their business model and product. 

What is Series A, Series B, and Series C funding?

Series A, Series B, and Series C funding are successive rounds of VC financing that startups typically go through as they grow and develop. Series A funding typically ranges from $2 million to $15 million. Series B funding ranges from $10 million and $30 million. Series C funding can exceed $30 million. Each round involves selling equity to investors. 

What is the startup failure rate by funding series?

A startup’s failure rate tends to decrease as the company progresses through funding series. Approximately 60-70% of startups fail before reaching Series A funding. Of those that secure Series A funding, 30-35% fail before reaching Series B. The rate drops dramatically; only 1% of those that raise Series B and beyond fail. Of course, reaching later funding stages does not guarantee long-term success.

Is Series B considered "early stage"?

No. While there's no universally agreed-upon definition, Series B is generally considered a growth or expansion stage rather than an early stage in a startup's lifecycle. 

How do I find investors for Series A funding?

Start by thoroughly researching and identifying venture capital firms and angel investors that specialize in your industry and typically invest in Series A rounds. Leverage your network. Attend industry events, pitch competitions, and startup conferences to meet investors and build relationships. Make sure you participate in those events to make the most of them.

Wrap up

Funding is essential for a startup’s success. From pre-seed to pre-IPO funding, each round brings in significant capital and also validates the startup’s growth potential.

The increased audits and reporting requirements that come with funding rounds, typically Series A and beyond, typically require more sophisticated financial and operational systems. Lean on Rho to scale. Rho's finance platform helps you manage cash and automate finance busywork, so you can focus on growing your business.

Schedule a demo today.

Isabel Peña Alfaro is a guest contributor. The views expressed are hers and do not necessarily reflect the views of Rho.

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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.