Series A, B, C, and D funding are rounds of financing that are provided after an initial investment of funds, typically known as the “seed funding stage.” Each round allows investors to partake in an investment of a high potential startup or small business in exchange for a stake in equityEquity stake refers to the ownership percentage an investor has within a business. This is usually accommodated by a convertible note, which is the financial agreement between the investor and your business. . These rounds typically have various purposes, funding amounts, and valuations, all of which intend to promote growth and expansion of the business being invested in.
How series A, B, C, and D funding works
| Funding round | Investor types | Purpose |
|---|---|---|
| Series A | Angel investors, venture capitalists, and startup accelerators | Stabilize and bring the business to the mass market |
| Series B | Venture capitalists and private equity firms | Expand product and delivery, explore new markets, and grow team |
| Series C | Venture capitalists, private equity firms, and hedge funds | Prepare for international expansion or initial public offering (IPO) |
| Series D | Venture capitalists, private equity firms, hedge funds, and investment banks | Promote expansion further or compensate for lack of capital in previous rounds |
When securing venture capital to scale a business, series A, B, C, and D funding rounds provide opportunities for a business to achieve its goals by receiving both financial and experiential support from investors.
Each round comes with varying requirements, all with the intention of setting growth benchmarks. Each round also supports a different purpose, whether it be developing products, expanding into new markets, or bringing the company public.
Not all rounds are necessary and can be utilized by a business until funding needs are satisfied. In fact, most companies only make it to series C, where — at that point — the company is maturing and has a strong reputation and foothold in the market.
Series A funding round
| Funding round | Funding amount | Valuation | Preparation |
|---|---|---|---|
| Series A | Generally from $2 to $20 million | Average of $10 million to $20 million | Pitch your business plan and growth projections |
Series A is the first funding round after the initial seed stage investments and is usually provided by venture capitalist firms, angel investors, and startup accelerators. Primarily used for stabilization and expanding the business in the market, this stage supports businesses with a working product and a presence in the market.
Since most startups can be unstable in revenue at this stage, series A funding amounts provide funding to businesses that already have a valuable customer base and strong growth trajectory. The total funding amount received will vary depending on business needs and investor interest and generally can range anywhere from $2 million to $20 million.
The valuation of a startup at this stage factors in the size of the business, product development, and market fit. Most businesses at this point have a valuation average of anywhere from $10 million to $20 million, but this value can vary greatly depending on the business and industry you’re in.
To prepare for a series A funding round, you should write a business plan that showcases the business background and structure, financial history, operations and product development, market need, and growth potential. This should be readily available to interested investors so that you can provide information regarding your business quickly.
Series A example: A rapidly growing startup is seeking investments to help it keep up with its business operations and expand. Let’s say it has secured series A funding via a venture capital firm. The funds are used to gain traction in the market and promote the business to a wider audience.
This round of funding helped stabilize and scale the business operations, provided for the onboarding of more team members, and accelerated product development for expansion into the market.
Series B funding round
| Funding round | Funding amount | Valuation | Preparation |
|---|---|---|---|
| Series B | Generally from $5 to $15 million | Average of $30 to $60 million | Show strong evidence of growth and strategy for continued profitability |
Series B is the second funding round and serves to scale the business further and provide expansion of production and distribution into new markets. Its primary objectives include the growth of operations, team structure, and customer outreach.
Funding is provided mainly by venture capitalists; however, private equity firms can invest as well. This stage is valuable since it offers support from investors, both financially and operationally, as they can provide business advice and guidance to help promote overall growth.
Series B funding amounts are to further promote growth by investing in the expansion results of the prior funding round and to divulge the business into new markets and seek a larger customer base.
The amount of funds raised will vary greatly depending on business needs and growth projections and can be driven by the amount of the previous round. Generally, funding amounts can range from $5 million to $15 million.
Obtaining series B funding is often considered the most difficult round to secure successfully as it usually requires proper scaling from prior funding rounds and a high business valuation, in which many startups may fall short.
This is calculated by factoring ownership percentages, along with pre- and post-investment valuations. Generally speaking, the valuation average of series B rounds runs anywhere from $30 to $60 million.
To secure series B funding, evidence of growth and establishment is the main priority since investors will look to your market success and expansion plans. A strategy on continued profitability is essential to convince investors to further support growth efforts and to ensure ample returns on their investment.
Series B example: After successfully continuing business growth and achieving stabilization, the startup decides to further promote new opportunities that better serve its customer base. To do so, the business seeks further financial support from investors to develop and market new products.This funding round then allows for the pursuit of more customers, hiring of more staff to engineer the new products, and further market expansion.
Series C funding round
| Funding round | Funding amount | Valuation | Preparation |
|---|---|---|---|
| Series C | Generally from $25 million to $100 million | Average of $100 million to $120 million | Demonstrate strong profit metrics and team |
This funding round is applicable to successful businesses that exceed expectations of prior funding rounds and are more prevalent in the market. It is also suited for businesses contemplating plans for international expansion, acquisition, or IPO.
It tends to have a more selective vetting process since investors receive further diluted equity stakes and try to mitigate risk in preparation for larger-scale expansion or acquisition. These investors are typically more established and can offer experience to help a business acclimate to expansion or acquisition plans.
Funding from a series C round will allow for further product development and capacity to heighten operations to fulfill expectations of moving into international markets, acquisition, or IPO. Funding amounts will vary greatly depending on expansion capabilities and generally fall within a range of anywhere from $25 million to $100 million.
Series C valuations will be tied to profit track records and focus on historical data rather than future company goals. Often, series C is considered the final funding stage for most companies. Obtaining further investments requires a higher business valuation average, usually anywhere from $100 million to $120 million, although it can often be much higher.
Preparing for this funding round commonly includes considerations for international expansion or IPO. In this case, a business likely already has a strong foothold in the market and has consistent profitability with regimented operations. At this stage, detailed evidence of the aforementioned credentials will be necessary to provide investors since they will utilize this information to determine their investments based on the company’s historical metrics.
Series C example:
The startup has further grown its business and has broadened its customer base enough to warrant requesting another funding round in pursuit of taking the company public. More investors now partake in funding the business and use their expertise to help facilitate the transition, which further promotes business growth and preparation for expansion into international markets.
Series D funding rounds
| Funding round | Funding amount | Valuation | Preparation |
|---|---|---|---|
| Series D | Varies greatly; anywhere from $100 million to $1 billion | Upward of $1 billion | Have a detailed action plan for further fund utilization |
Series D and subsequent funding rounds are fairly uncommon. This is because this stage is usually used to prepare for IPO or acquisition, fund new opportunities, or cushion failed expectations from a previous round.
While ownership is further diluted, businesses can benefit from the expertise provided by these types of experienced investors to navigate the scaling of the business to a higher level. These investors look for companies with significant proven growth capabilities and include venture capitalists, private equity firms, and investment banks.
Because so few companies reach this stage, funding margins are vast and based on business needs. Whether it be a funding boost to launch a new product or to compensate for lack of capital in prior rounds, series D funding can run anywhere from $100 million to $1 billion.
If a company reaches a series D funding round, it is likely well-established and has a high valuation that reflects its profitability. Investors can require a valuation upwards of $1 billion, a rare target for startups to meet.
Series D preparation involves similar preparation as prior rounds in that a demonstration of strong profitability and overall growth will be necessary to attract further investments, especially this far down the line of funding stages. To secure funding, you’ll need to provide detailed plans for funds utilization and considerations of how to bridge the gap between valuations, if necessary.
Series D example:
The opportunity for acquisition has been presented to the startup. To ensure a smooth transition, the startup requests a final round of funding to maintain compliance and heighten the company’s valuation before exiting the business. The funds are used to tie any loose ends and eventually sell the business.
Pros and cons of series A, B, C, and D funding
| Pros | Cons |
|---|---|
| Provides for new product development and expansion into new markets | Means a dilution of ownership the further the funding round |
| Comes with support and guidance from investors to help navigate the growth of a business | Comes with high expectations to provide a return on investment each round |
| Presents an opportunity for higher business valuations over time, which can provide better terms and conditions | Has varying requirements for valuation and funding targets each round |
Who series A, B, C, and D funding is right for
Series A, B, C, and D funding rounds are best suited for small or startup businesses seeking funding outside a startup business loan and wanting input from seasoned investors to help grow their business. That said, it’s best suited for
- Businesses that don’t qualify for traditional financing: If getting a small business loan is unattainable due to limited resources or lack of credentials, a business can pursue startup series funding if they need an alternative financing source.
- Businesses that have surpassed the initial seed funding stages: Series A, B, C, and D funding rounds follow initial investment stages and apply to businesses that have already received seed funding and are already operating.
- Businesses with long-term goals for expansion: Utilizing multiple funding rounds can promote a strong growth trajectory if a business is interested in expanding into international markets.
Frequently Asked Questions (FAQs)
No. Funding rounds can end in various stages, as subsequent funding rounds can be utilized on an as-needed basis once all business funding needs are met.
Yes. The more funding rounds that occur, the more investors become involved and, ultimately, the more diluted your ownership percentages become.
Yes, the valuation of a business is a key factor for investors in determining to further invest in a business. The higher the valuation, the better the chances of receiving further financing.
Bottom line
Startup funding rounds are often vital to the success of small or startup businesses looking to grow. The provided venture capital from series A, B, C, and D funding rounds can be used for a variety of business purposes and also provide insight from qualified investors. While not every funding round is necessary, it offers the opportunity to reach a wider audience of investors and a way to continue expansion to contribute to the success of a business.
