Raising equity funding for a startup can be a long, difficult, and sometimes demoralizing process. However, if successful, the capital injection of a funding round can help a startup to potentially grow at a faster pace compared to bootstrapped startups.
One of the major challenges that founders face is that raising a round often takes more time than they initially expected. It’s important for founders to understand the dynamics of their relationships with investors at each stage and to have a clear plan for how to use the funding to grow the business. In this article, we will break down the different stages of startup funding, from pre-seed to Series E, including the process, structure, requirements, average payout amounts, and the different types of investors involved in each round and their expectations.
Pre-Seed Funding: The Early Days
Pre-seed funding is the earliest stage of funding, and many people don’t even consider it part of the cycle of equity funding. At this stage, the founder is typically working with a very small team (or even by themselves) and is developing a prototype or proof-of-concept. The money to fund a pre-seed stage typically comes from the founders themselves, their families, friends, and maybe an angel investor, accelerator or incubator. The average payout for a pre-seed round is around is usually between €150-€250k. Investors at this stage are usually rather investing based on the idea, team and the founders, not so much based on the current stage of the product or based on current business metrics.
Seed Funding: The Initial Investment
Seed funding is the next stage after the pre-seed phase and it is usually the first round of formal investment. This round is usually led by angel investors, but in some cases it is also joined by early-stage focused venture capital firms. For this stage, the company should have a clear business plan and a working prototype, and the funds are used to cover the costs of development, marketing and other expenses needed to validate the product-market fit. The average payout for a seed round is between €500k and 2 million. Investors at this stage are usually angel investors and early-stage venture capital firms, who are more likely to invest in the product, the market and the team, and they would expect to see a working prototype, early traction, and a clear path to product-market fit.
Series A Funding: The First Institutional Round
Series A funding is the first stage of institutional funding, and typically involves venture capital firms. The company should have a working prototype and a clear plan for how to bring the product to market. The average payout for a Series A round is around €3-8 million. Investors at this stage are usually venture capital firms who are more likely to invest in a validated product-market fit, a clear revenue model, and a path to scaling the business. They would expect the startup to demonstrate traction, a clear path to profitability and a detailed plan on how to scale the business.
Series B Funding: Scaling the Business
Series B funding is typically used to scale the business and gain market share. The company should have a clear revenue model and be generating revenue. The average payout for a Series B round is around €10-25 million. Investors at this stage are usually venture capital firms who are more likely to invest in a company that has demonstrated strong traction, a proven revenue model, and a clear path to scaling the business. They would expect the startup to have a clear strategy for growth and a solid management team in place to execute it. They would also be looking for a clear plan on how the funds will be used to achieve the growth goals and how it will help the startup reach the next stage of funding.
Series C Funding: Preparing for an IPO or Acquisition
Series C funding is typically used to expand the business further and prepare for an IPO or acquisition. The company should have a strong track record of growth and profitability. The average payout for a Series C round is around €25-75 million. Investors at this stage are usually growth-stage venture capital firms, private equity firms and strategic investors who are more likely to invest in a company that has a strong track record of growth and profitability, and a clear path to an IPO or acquisition. They would expect the startup to have a solid management team in place, a clear strategy for growth and a clear plan on how the funds will be used to achieve the growth goals.
Series D and E Funding: Late Stage Expansion
Series D and E funding are later stage rounds that are typically used for expansion, acquisitions, or preparing for an IPO. The average payout for a Series D round is around €40-80 million and for a series E round is around €60-125 million. Investors at this stage are usually late-stage venture capital firms and private equity firms, who are more likely to invest in companies that have a strong track record of growth and profitability, and are preparing for an IPO or acquisition. They would expect the startup to have a solid management team in place, a clear strategy for growth and a clear plan on how the funds will be used to achieve the growth goals. They would also expect the startup to have a clear exit strategy for the investors and a plan for the future development of the company.
Additional Thoughts
In summary, each funding round will have different investors with different expectations, it’s crucial for founders to understand the expectations of the investors involved in each round and to be able to communicate how they plan to use the funds to achieve the growth goals. This will help them build strong relationships with investors and increase the chances of raising the needed funding.
Despite all the opportunities that VC funding can bring to startups, it is also important to remember that raising funding is not the only way for a startup to grow and be successful. Alternative options such as bootstrapping, debt financing, or revenue-based financing may also be considered. Especially, since each VC funding round also leads to a dilution of founder shares. It is not uncommon that founders of Series C/D stage companies happen to only remain with around 3-5% of the shares.
