Venture-backed startups make headlines, but they’re far from the norm. For the average startup, funding rounds are generally limited in frequency and conservative in the amount raised.
The truth is, most startups either get acquired, fail after fundraising, or fail to raise funding entirely. And those that successfully raise a round of funding are by no means guaranteed to raise another.
In this article, we cover the common startup funding rounds, details about each round, and an example of a startup navigating the valuations and dilution of each round.
Example of Startup Funding Rounds
Throughout this article, we will focus on a hypothetical cloud computing startup, Younicorn, on its path to a billion-dollar exit and unicorn status. Along the way, we will track how much funding is raised, how much equity is retained by the founding team and how much equity is purchased by the investors.
In our example, we make an assumption that the valuation increases at a steady, compounded rate, doubling every round. Here is a table outlining a possible path to a billion-dollar outcome:
Pre-Seed Round: Friends and Family
When a company is in its infancy and it’s not yet clear whether the idea is feasible, or the business model viable, institutional investors are essentially out of the question. Companies in this stage are typically funded by the founding team, friends, family, or angel investors.
Raising money for this stage of “business” (the term here is used loosely since the company probably doesn’t make money yet) requires people willing to take a big risk on the team and idea. This round has been referred to as an investment in the team and the dream.
Funding for this round can also come from incubator and accelerator programs, crowdfunding campaigns, or angel investors.
The pre-seed round provides enough fuel in the tank to get you down the runway, but definitely not enough to take off. Pre-seed rounds are usually just enough to show proof of concept, and typically fund three to nine months.
The average pre-seed round in 2020 was between $500,000 to $1,000,000.
Example: Younicorn was able to raise a $350,000 angel round from angel investors, friends, and family. They were able to get a $3 million pre-money valuation and sold 10.4% equity. This means the founders retain 89.6% equity.
Seed Round: Angels and Syndicates
After the pre-seed round, if the company has shown promising signs of product-development, customer-development or other forms of progress, it might be time to raise an actual seed round.
The seed round is where companies raise enough money to see them through a successful go-to-market strategy, or about 12 to 18 months.
In 2017, Union Square Ventures VC Fred Wilson used data from his portfolio companies to show that the average length of time between funding rounds was 18 months. He also mentions that entrepreneurs should plan on it taking three to six months to raise another round.
Seed round funding amounts can range anywhere from $1 to $5 million or more depending on the industry. The average seed round in 2020 was $1.5 million. Potential investors in seed rounds include angel investors, syndicates, equity crowdfunders, and even some early-stage VCs.
Example: Back at Younicorn, the team has built an early base of beta users and is now ready to launch their alpha to the general public. They are seeking $1.5 million at a $6 million pre-money valuation to achieve product-market fit. After their seed round, the founders own a combined 71.6% and investors own a combined 28.4% equity.
Seed Prime: Current Investors
As the ecosystem for startup funding has evolved, entrepreneurs have found ways to extend their financial runway without having to raise a formal round – hence the Seed Prime.
This round is essentially a bridge loan from current investors, referred to as inside rounds, to extend the runway enough to avoid running out of money and continue growing before raising a formal Series A.
Series A: Venture Deals
Only after the company has gone through its rite of passage (raising seed round financing) will it be ready to approach established institutional investors to raise a Series A. Venture capitalists, a class of institutional investors that invest in growth-stage startups, are the most likely candidates for writing Series A checks.
According to Crunchbase, 41% of Series A raises between 2018 and 2020 ranged from $4-$10 million. Interestingly, more than 14% of Series A rounds were for greater than $20 million.
The scale of today’s Series A rounds is why the concept of a lead investor has become increasingly important. A lead investor invests the most, actively participates in negotiations, and often takes a seat on the board of directors. Other investors will participate in the round, reducing the risk for the lead investor and helping the entrepreneur raise more capital.
Example: Younicorn has been growing significantly among its early adopters and is ready to scale to a wider audience. The team is raising a $3 million Series A at a $12 million pre-money valuation ($15 million post-money). The Series A investors receive 14.3% equity, diluting the founding team to 57.3% ownership.
Venture capitalist Tomasz Tunguz has said, “the Series B is the last milestone before proving cash is the business’ limiting factor.” Effectively, Tomasz is saying the only thing holding your company back from compounding growth is the cash flow necessary to get there.
Even though some Series A rounds can and do exceed $20 million in funding, the average Series B round in 2020 was between $17-$25 million. Series B rounds can be raised through mid- to late-stage venture capital firms, equity crowdfunding, and sometimes private equity firms.
Example: It’s been 2½ years since Younicorn was founded. They now have a talented executive team in place, a repeatable sales model, customer retention, and growth. Younicorn is ready to scale, but first needs to raise their Series B. They plan to raise a $6 million round at a pre-money valuation of $24 million. Series B investors receive 11.5% equity, leaving the founders with 45.9% of the company.
Raising a Series C is a big deal. By now, the company has established product-market fit, customer retention, a scalable business model, a proven team, and a large total addressable market.
In 2020, the average Series C round raised between $30-$40 million. We mentioned lead investors earlier and their importance continues to grow with each funding round.
Since the average venture capital fund size has been less than $100 million for many years, an investment of this magnitude would engulf one-third or more of the entire fund. No venture capitalist would assume this kind of risk, understanding that most companies fail. This is why the round must be filled with many investors, but one lead investor to handle logistics. Crowdfunding platforms can sometimes handle the fundraising logistics a lead investor would otherwise handle.
While the Series C round for many companies is the final venture deal before moving on to alternative types of investors and an eventual IPO, some companies choose to remain private and will raise venture Series D, E, F, and beyond. These are known as growth rounds.
Example: Almost 4 years since its inception, Younicorn has been compounding growth across all its key performance indicators and is ready to raise a Series C with a clear path to an IPO. The team seeks $12 million in exchange for an additional 9.2% equity. After a successful Series C round, the founders retain 36.7% and investors now own the lion’s share of the company at a combined 63.3%.
Growth Rounds: Series D Through F+
As mentioned, when companies move to raise funding beyond their Series C round, they are opting to remain private which does have its benefits for growth. The process of going public and maintaining a public company is time-consuming, resource-intensive, and prioritizes results in the short-term over the long-term.
Public companies are subject to financial and informational disclosures which are not beneficial for companies that want to remain tight-lipped to their competitors and even customers. Growth rounds are opportunities for raising the necessary capital to scale to the next level without the many hassles of an IPO.
Example: Delaying their IPO and deciding to remain privately held, Younicorn proceeds as a private company for another few years, raising a Series D, Series E, and Series F round. Here is how those rounds progressed:
|Round||Raise||Pre-Money Valuation||Founders Own||Investors Own|
While filing for their IPO, Younicorn was acquired for $1 billion. As the cap table stood after its last funding round, the founding team owned almost 21% and their investors owned nearly 80%. The founders walked away with more than $207 million, but the investors earned more than $790 million.
Tips From Investors
Below are quotes from some of the most successful startup investors of all time. Their advice should be taken seriously – especially if you are pitching one of them.
- “The earlier the investment stage, the more you should think of [investors] as partners versus buyers of stock.” | Chris Dixon, Andreesen Horowitz
- “If you’ve launched and have traction but you’re not getting funded, your team is likely the problem. Look in the mirror.” | Naval Ravikant, AngelList
- “It takes way longer than you think.” | Babak Nivi, AngelList
- “The best way to survive the distraction of meeting with investors is to partition the company: to pick one founder to deal with investors while the others keep the company going.” | Paul Graham, Y-Combinator
- “Practice your [pitch] narrative over and over.” | Jeff Clavier, Uncork Capital
- “Build relationships with VCs months ahead of your Series A round because your lead investor will assume a board seat for the life of your company; It’s important to find the right Series A investors.” | Aaron Harris, Y Combinator
- “Raise less money.” | Aaron Harris, Y Combinator
Navigate Your Funding Rounds
If you’re one of the lucky few to successfully raise multiple rounds of capital for a growing business, you will likely learn all of these lessons along the way – we just hope this can help avoid learning some of the lessons the hard way.
If you’re looking for a starting place for raising capital for your seed round and beyond, sign up for EquityNet to immediately access thousands of investors looking to invest in startups like yours. EquityNet can also help you analyze your business plan and to benchmark your business against peers in your industry.