What are the differences in funding rounds? Series A? Friends and Family? Seed?
When you first work in the startups you can’t but help notice press releases about various funding rounds (especially if your employer has raised recently / is planning to raise). These announcements generally mention the amount raised and the valuation. They can also mention the ‘funding round’ that the investments were made as part of.
i.e. “HonkyTonk.io announce a £10m Series A, led by Bamboozle Ventures, valuing them at £100m”
We have written various bits on how to understand the valuation, understand how much dilution the raise has caused, or even who has provided the funding.
This post is about understanding what the ‘funding round’ means. As usual, we have tried to break down the various nuances below. Our understanding that typically only 1 in 10 startups progress through each round:
Friends and Family round - As the name suggests this is an investment round where friends and family of the founder put money into the business. This is always the first ever round raised, though not all start-ups have one, going straight to a pre-seed raise.
This round will not be higher than the SEIS limit (£250k) and usually closer to £100k. The round is very much focused on the earliest of start-ups, which in many cases are just an idea on paper, with the funding allowing the founders to quite their jobs and explore the idea.
Valuations at this stage can be <£1m. The advantage of this round is that it is a lot easier to raise from people that know you than strangers, which angels invariably are. This also means that the round (if possible) can close a lot quicker, as there is a lot less due diligence involved.
Also, as my friend Gary Izunwa would say, this round just shouts of ‘privilege’. Not many people are lucky enough to have friends or family that can invest £100k of net income in their start-up…
As such, on a side note, If you wish to help with social mobility in society, Amir is a long term trustee of the excellent charity Making the Leap.
Pre-Seed round - The majority of startups, start here. The first proper funding round. Again this round should very much have SEIS eligiblity still in place. The round size would typicially be £100-500k, with the higher end being seen achieved by experienced founders. The pre-seed round is typcially for funding an idea into a MVP or a MVP into something that can be scaled in the first targetted market.
We have invested in both of these scenarios but this is rare. Most angels will want to see data from a MVP, even at this early stage, before committing to invest.
Valuations at this stage are <£2-6m, with higher valautions only being realsied by previously exited founders or experienced operators with relevant expeirence. It is rare to see anyone other than angels in these rounds.
Seed round - Typically this is the last round, before the funds step in and the ‘series X’ funding rounds start. A seed round is usually in the form of a £1-2m raise at a valuation of £10-20m. Obviously this can vary above and below, depending on how ‘hot’ the round is, how much runway the startup has left (and desperate they are) etc..
Seed rounds are usually funded through a variety of angels, syndicates and seed funds, as such managing to raise at this stage is validation that the idea / MVP at the pre-seed stage, continues to be worth exploring.
The goal at the end of the funding raised at the seed stage has to be have collected enough users or revenue to justify a fund coming in at Series A. The ideal would obviously to generate enough revenue to be breakeven and raise at a time of the founders choice.
Bridge round - A bridge round occurs between ‘seed’ and ‘series A’, when the startup continues to show traction but not enough (yet) to attract funds to lead a Series A. In some cases, the startup may choose to pursue the smaller bridge round by choice, so that their Series A is more competitive and offers them better terms.
i.e. dilute a little earlier to ensure less dilution at Series A
In many cases the bridge round can be in the form of an ASA, as the investors and founder can’t / don’t want to agree on a valuation, so instead to agree to have a discount terms for the advance investors. This also massively simplifies the legal process for this round.
Series A - Series As (or Bs, Cs, etc) are funding rounds that follow the angel led rounds of investment, being led by some sort of fund (VCT or VC). As such, the Series A will involve a significant amount of the startup’s equity being sold (the lead fund will want 10% ownership). As such, there will be a lot more due diligence at this stage and funds will start inserting specific clauses into terms sheets to protect them, such as; needing board seats, non-dilution preventions, preference shares, etc..
As an angel, you are now very much in the back seat and beholden to the funds and the board of the startup. Hence, in many cases this is a good stage to “take money off the table” and sell some or all of your investment. If things go bad, your investment will be quickly lost or diluted as the fund’s preference shares take precedence.
The goal of every angel, should be to get their early-stage investments to Series A and see the startup outgrow them and no longer require their guidance.
Series B+ - At this point, the startup is flying. They are hopefully raising (if needed) sequental Series B, Series C etc rounds, increasinging their valuation meaningfully each time and more importantly getting closer to some sort of exit / liquidity event, which returns money (and gains) to all their investors.
As such, the founder of the startup will start shifting focus to activities likes getting to profitability and hyper scaling across markets, increasingly forgetting the lowly angels who backed them early on.
At this you are pretty much waiting to hear news of anoter funding round, an acqusition happenening or the startup preparing to IPO (which suggests they have outgrown being a startup a while ago…)
Note: Image generated using DeepAI with the text “differences in investment rounds”
