Funding Rounds provide outside investors the opportunity to invest cash in a growing company in exchange for equity, or partial ownership of that company. When you hear discussions of Series A, Series B and Series C funding rounds, these terms are referring to this process of growing a business through outside investment...
t's not uncommon for start-ups to engage in what is known as seed funding or angel investor funding at the outset. This can be followed by Series A, B and C funding rounds, as well as additional efforts to earn capital. Series A, B and C are necessary ingredients for a business that decides bootstrapping, or merely surviving off of the generosity of friends, family and the depth of their own pockets, will not suffice.
The path for each start-up is somewhat different, as is the timeline for funding. Many businesses spend months or even years in search of funding, while others (particularly those with ideas seen as truly revolutionary or those attached to individuals with a proven track record of success) may bypass some of the rounds of funding and move through the process of building capital more quickly.
Once you understand the distinction between these rounds, it will be easier to analyse headlines regarding the start-up and investing world, by grasping the context of what exactly a round means for the prospects and direction of a company. Series A, B and C funding rounds are merely stepping stones in the process of turning an ingenious idea into a revolutionary global company, ripe for an IPO.
Before exploring how a round of funding works, it's necessary to identify the different participants. First, there are the individuals hoping to gain funding for their company. As the business becomes increasingly mature, it tends to advance through the funding rounds.
On the other side are potential investors. While investors wish for businesses to succeed because they support entrepreneurship and believe in the aims and causes of those businesses, they also hope to gain something back from their investment. For this reason, nearly all investments made during one or another stage of developmental funding is arranged such that the investor or investing company retains partial ownership of the company. If the company grows and earns a profit, the investor will be rewarded.
Before any round of funding begins, analysts undertake a valuation of the company in question. Valuations are derived from many different factors, including management, proven track record, market size and risk. In turn, these factors impact the types of investors likely to get involved and the reasons why the company may be seeking new capital.