Blog

Understanding the Early Investment Stages

This post is part of the Entrepreneurial Education Series, which brings together successful, influential entrepreneurs and investors to teach entrepreneurs everything they need to know about early-stage investment through events, articles, videos, and more. If you are interested in learning more about raising a round, save the date for “Early Stage Investment 101” on June 17.

There are plenty of resources on fundraising for your startup — how to know if your business is ready to raise, where to get capital, and how to convince investors to provide that capital. But to really successfully fundraise, you should start by understanding the actual funding stages and how they build off of each other.

Here’s your official investor-approved cheat sheet:

Seed/Friends and Family

Think of a seed round as step one. It’s the first capital in, and it allows a startup to begin moving from an idea or prototype towards more fleshed out operations with the support of close friends and family. These are the riskiest investments, namely because there is likely no business yet. This is also usually the critical point in a startup’s life when it’s determining whether it’s actually more than an idea, and if it is a true business, if it’s an investable one.

Pre-Series A

The Pre-Series A stage is typically when a startup moves from a prototype to an actual product, seeking outside capital to help fund that first growth point. Venture capitalists and formal angel groups may begin to express interest and invest at this point, but it’s more likely that it will come from early-stage individual investors.

Pre-Series A deals are sometimes priced, but can also be bridge rounds.

Bridge

In a bridge round, a company raises a convertible note in order to continue growing. Bridge rounds can be used between priced rounds. However, increasingly, bridge rounds have been used before priced rounds to help a company get to the next critical funding milestone. There is a risk associated with this approach because raising the note allows an entrepreneur to put off pricing the round, creating complications for him/her and the investors later on. Nevertheless, this kind of bridge has continued to be very popular, especially as a means of getting young startups to the difficult Series A stage.

Series A

At the Series A stage, companies usually have the product, customers, and some incoming revenues, but aren’t necessarily bringing in profits. They may need outside capital to keep pace with demand and their supercharged growth, or need an injection of capital to actually achieve significant growth.

The Series A round is priced, which means the bridge automatically converts. Institutional investors like venture capitalists, formal angel groups, and strategic partners are generally leading the round.

The key point to remember is that these investors aren’t injecting capital into the business simply because it needs it. If the company is failing and needs more money periodically just to stay afloat, then it stops looking like an attractive investment. Investors don’t want to write checks for an opportunity that isn’t capable of offering a return.

Series B & Beyond

A startup raises Series B, C, D and on (depending on the needs of the company) to expand market penetration after validating the market need in the previous rounds. Series B and later rounds are also institutionally led, though participants from earlier rounds may still play a part in the overall raise.

Key Takeway

Even at the very beginning of your raise, you should be preparing for subsequent rounds of financing. Keeping your eye on the fundraising trajectory will help you assess what milestones you need to achieve and focus on understanding your business’s capital needs over time.