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The 6 Stages of Venture Capital Funding

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When it comes to funding your startup, venture capital (VC) is one of the best types of funding available to you. There’s no obligation to pay venture capital back, so the investors are the ones taking on the majority of the financial risk of your startup idea failing. 

This funding can be used to hire key staff, build and develop your product, market your product, and more. Almost every startup can benefit from raising venture capital at different points in their journey.

If you’re considering the idea of seeking VC funding to kickstart your business, it’s essential to understand what the venture capital process is and what you can expect from the different stages and types of venture capital.

What Is Venture Capital?

Venture capital is a type of private equity funding investors give to startups and early-stage small businesses they believe have a high potential for long-term growth.

Venture capitalists provide this funding in exchange for a stake of equity in the companies they invest in. They typically take a minority stake in the company, and their level of involvement in day-to-day operations and decision-making can vary.

You may also want to read What Are Venture Capital Firms & How They Work In 2022.

VC investment in the US

How Do Startups Get Funding?

Founders can choose from four main sources of startup funding to finance their projects. These are self-funding, small-business loans, angel investments, and venture capital.

Self Funding

While most startup founders invest some of their own money in their ideas to get started, self-funding an entire startup is very expensive. 

Therefore, self-funding an entire startup is rare, and founders typically need to look for additional funding.

Sources of self-funding can include personal savings and credit from credit cards.

Small-business Loans

After putting their funds into a new business, many founders' next source of startup capital is traditional lenders, such as banks and other financial institutions. There are also less traditional lenders, such as online lenders, that some startup founders seek funding through.

A benefit of funding a startup with a small-business loan is that you retain full ownership of the company. However, these types of loans also come with (often high) interest rates, and you typically have to start paying them back immediately.

Angel Investments

Angel investors are wealthy individuals, often entrepreneurs, business people, and former startup founders, who invest large sums of their own money in business ventures. In other words, they are private venture capitalists.

Angel investments are usually given in exchange for a percentage of ownership in your company, so it means giving up full control of your startup. But, unlike loans, you aren’t expected to pay any of this money back if your business fails.

Depending on the angel investor, they may want to play a more active or passive role in the company’s decision-making and management.

A prime example of angel investors at work is the show Shark Tank, in which small business owners pitch their ideas to investors (like Mark Cuban) hoping to receive an angel investment in return for a stake in their company.

Venture Capital

Venture capital is similar to angel investments in that it is capital given to startups in exchange for company equity, and there are no obligations to pay the money back if the business fails.

The main difference between angel investments and venture capital is that venture capital usually comes from a VC firm or a VC fund, and the company or fund receives the equity (instead of a single person).

In the case of a VC fund, the equity would then be split between the fund’s limited partners.

Pre-Seed Stage

What Is Pre-Seed Funding?

Pre-seed funding is the earliest stage of venture capital. It’s typically the first round of funding any startup gets in its lifecycle and is a way for a startup in its earliest stages to become a venture-backed company.

You may or may not have to trade equity for pre-seed funding, depending on the source you get it from. If you don’t trade equity, pre-seed funding usually comes in the form of a loan, so you have to pay it back.

When To Raise Pre-Seed Capital

Founders can raise pre-seed capital before they even have an MVP or prototype of their product/service when their business idea is still taking form.

Before raising pre-seed venture capital, ensure you’ve done thorough research to validate your startup idea.

If you have a good idea that solves a real problem, you can then use pre-seed funding to get the idea off the ground.

For example, you could use the funding to pay a developer to build an MVP of your product.

How To Get Pre-Seed Funding

As with any type of early-stage VC funding, it’s ideal to have a pitch deck to present to potential investors or lenders to sell them on your idea.

However, as pre-seed funding is the earliest stage of venture capital, getting it can often be less formal.

You may be able to secure pre-seed capital from sources other than your funds simply by talking to people about your idea and asking for support.

This is especially true if you’re asking for pre-seed funding from friends, family, and other people in your network.

You may also want to read our Pre-Seed Funding guide.

What’s the Average Pre-Seed Funding Amount?

Like all types of venture capital, pre-seed funding amounts can vary greatly on a case-by-case basis.

But pre-seed capital given is typically on the lower end of the scale, between $50,000 and $200,000, although it could be significantly less or more.

Most Common Investor in This Round

Pre-seed funding most commonly comes from founders themselves (self funding), their friends and family members, angel investors, and startup accelerators/incubators. 

Pre-seed capital also sometimes comes from micro VCs, which make a lot of small investments in early-stage startups, building a portfolio of many smaller bets rather than fewer large ones.

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Seed Stage

What Is Seed Stage Funding?

Seed stage funding is the second-earliest stage of the venture capital process and is usually given to startups that are past the conceptual stage or have already received a round of pre-seed funding.

Although it comes after the pre-seed stage, seed stage funding is often the first formal type of venture capital that many startups raise. This is because pre-seed funding often comes out of founders’ own pockets or from their friends and family rather than VCs.

When To Raise Seed Stage Capital

Ideally, you should already have some prototype or MVP before asking investors for seed stage funding.

If you already received pre-seed funding, having a working version of your product shows investors that you put the capital to good use, and they’ll be more likely to give you more to continue iterating and building on your product.

How To Get Seed Stage Funding

To secure seed capital, you must create a professional pitch deck to show to potential investors.

This pitch deck should give a high-level overview of your product or service in no more than 10 to 14 slides and cover all the essential points, including the problem/solution, key product features, market fit, competitors, business model, revenue, traction, and team.

Once you have this deck, you can apply to different VC programs by following their unique application processes, which are usually explained on VC firms’ websites.

You may also want to read our Guide to Raising Seed Funding in 2022.

What’s the Average Seed Stage Funding Amount?

The average seed stage funding amount is around $500,000.

One example of a company that raised this amount is Facebook, which secured $500,000 in seed funding from angel investors way back in 2004.

That being said, many startups have been known to raise seed capital in the millions of dollars.

For instance, Ghanaian finch startup Dash raised $32.8M in seed funding in March 2022.

Most Common Investor in This Round

Angel investors are a very common source of seed stage funding, but it also frequently comes from early-stage VC firms and startup accelerators.

Y Combinator is an excellent example of a VC firm/startup accelerator that is known for giving out seed funding to many startups.

Series A

What Is Series A Funding?

Series A funding is early-stage venture capital provided to startups that already have some level of operational stability.

In other words, it’s funding given by VCs after the startup’s product has some traction and their long-term business model has started to take shape.

Startups may use this money to keep paying existing employees, hire new team members, continue optimizing/iterating on their products, pay for marketing and advertising, and fund other essential business activities.

When To Raise Series A Funding

You should only consider raising series A funding after you have a working product on the market and your business operations are somewhat stable.

It’s not necessary to be profitable yet, but you should be generating some sort of revenue before you ask for series A venture capital.

If you’ve already raised pre-seed and seed funding, and your business is stable enough to start thinking about long-term growth, it could be time to seek series A funding.

How To Get Series A Funding

To secure series A funding, you’ll need to present an accurate analysis of your business operations up to this point, including its current revenue, business model, past sales, market size, growth rate, and potential risks.

You should also use all the data available to come up with an accurate estimate of your startup’s valuation.

Investors will look at the data and your estimate of your startup’s valuation to decide whether it’s worth investing in at this point or not.

You can also read our Guide to Raising a Series A Round in 2022.

What’s the Average Series A Funding Amount?

The global average for series A funding sum is around $18M. But, in general, the higher a company’s valuation, the more series A funding it may raise.

For example, companies valued in the $60M to $80M range may be able to raise $20M+ in a series A round.

Most Common Investor in This Round

Series A funding usually comes from well-established VC and private equity firms that manage huge portfolios worth billions of dollars. It can also come from individual angel investors.

Series B

What Is Series B Funding?

Series B capital is typically the last round of early-stage venture capital. It’s a cash injection given to help the business continue scaling after it’s already generating revenue.

Startups might use series B funding to finance major marketing efforts, continue growing the team by hiring top talent, or add more products or services.

Series B funding is generally reserved for mature early-stage startups trying to capture a larger market share and need more funding.

When To Raise Series B Funding?

If you have a mature product, stable business operations, and a steady stream of revenue but need more cash flow to meet large-scale business demands, it might be time to seek series B funding.

In other words, if you’ve already spent your series A funding and are ready to scale your business operations again to generate more sales and compete with more prominent brands, you can try to raise series B capital to help you do so.

How To Get Series B Funding?

As with previous rounds of venture capital fundraising, you’ll have to give up some equity in your company in exchange for series B capital.

At the series B venture capital stage, VCs tend to pay less for the equity you give them.

This is because, at this stage, most companies are on the border of jumping from being a small business into a mid-sized or large business, and there’s more chance of failure at this scale.

So, you’ll need to demonstrate to investors that your business is ready to take that leap and cross over into a bigger market.

Before asking for series B funding, make sure you have a large, loyal customer base.

It also helps if you have a new development in the works and a high potential to capture a larger market share through new products and services (or new versions of existing ones).

What’s the Average Series B Funding Amount?

Series B funding rounds usually offer from $7 to $10 million.

Series B capital amounts are typically much lower than previous rounds because much of the most expensive financing has already been taken care of by pre-seed, seed, and series A funding.

But there’s no set-in-stone rule for how much funding you can get from a series B round. Companies have raised tens of millions of dollars in series B capital — it all depends on various factors, including the industry, the company’s valuation, and more.

Most Common Investor In This Round

Venture capital firms are the most common series B investors, with angel investors being the second most common source of series B funding.

Series C and Beyond (Expansion Stage)

What Is Series C Funding and Beyond?

Series C funding is provided to companies that have outgrown the startup category. 

Any venture capital given in series C or subsequent fundraising rounds is considered to be in the expansion funding category.

At this point, the business is already successful and needs more funding to expand its operations in a significant way. This might include drastically increasing the company’s workforce or expanding internationally.

When To Raise Series C Funding and Beyond

You should only consider seeking series C funding if your company is fully established and profitable and no longer feels like a startup. 

You should have a mature product and a high level of brand recognition. 

Most companies that get series C funding are valued well above $100M.

How To Get Series C Funding and Beyond

You may need to change your approach to fundraising when you’re looking to get series C funding, specifically in terms of who you ask.

Although some VC firms give out series C funding, others only focus on more early-stage startups.

Since your business is considered mature at this point, it’s common to get series C funding from new investors, such as private equity firms.

What’s the Average Series C and Beyond Funding Amount?

The average amount raised in series C and subsequent fundraising rounds is approximately $60M.

Again, this varies significantly on a case-by-case basis and highly depends on a company’s valuation.

For example, companies valued between $100M and $120M tend to secure around $52.5M in series C funding.

Companies with significantly higher valuations, such as those valued over $1B, can get hundreds of millions of dollars in series C funding.

Most Common Investor in This Round

Private equity firms, hedge funds, and investment banks are the most common sources of series C venture capital.

It’s possible for series C funding and subsequent venture capital to come from VCs who have been investing in a company since its early stages. Still, it’s common for new investors to hop on board at this point too.

This is because, since businesses ready for series C funding are already successful and profitable, there is less risk, attracting different types of investors.

Mezzanine Financing

What Is Mezzanine Financing?

Mezzanine financing is a unique type of late-stage venture capital loan. It is a hybrid of debt and equity financing that allows lenders to convert the debt into equity.

Mezzanine financing is very high risk for lenders because they could potentially lose their investment if the borrowing company goes bankrupt, as companies have to pay more senior debt holders first.

But, it also offers investors some of the highest interest rates, often in the range of 20% to 30% annual interest, with a minimum rate of 12%.

When To Raise Mezzanine Financing

Mezzanine financing is usually raised to fund special projects, late-stage expansion, or to aid with an acquisition. It’s usually the last form of venture capital you should raise for a startup, typically pre-IPO or acquisition.

How To Get Mezzanine Financing

There is usually a lengthy negotiation process (three to six months) to get mezzanine financing from lenders.

This negotiation process involves agreeing on the loan amount, interest rates, and terms of the deal with potential lenders and putting together all the required legal documentation.

What’s the Average Mezzanine Funding Amount?

There’s no average mezzanine funding amount, as the amount varies greatly on a case-by-case basis. 

However, mezzanine funding amounts are usually in the intermediate venture capital range of $5M to $100M.

Most Common Investor in This Round

Mezzanine financing is usually provided by a company’s primary, long-term investors. 

For example, it might be the final round of funding provided by a VC firm that has invested in a company from its very early stages.

This type of funding can also come from more traditional lenders, such as investment banks.

Global venture dollar volume through Q3 2022

Wrapping Up

There are many advantages of venture capital, and raising different types of venture capital at different stages of your startup’s lifecycle can provide the boost you need to take your company to the next level.

In fact, most startups fail if they do not raise some type of venture capital because they simply don’t have the financial resources available to grow, evolve, and sustain their businesses.

By now, you should understand the different stages and types of venture capital better, so you can decide where in the process of venture capital funding you and your startup idea might fall.

FAQs

What Are the Types of Venture Capital?

Venture capital is primarily divided into early-stage and expansion funding. Early-stage venture capital comes from pre-seed, seed, series A, and series B funding rounds. Expansion venture capital comes from Series C and all subsequent funding rounds.

What Is the Venture Capital Process?

Venture capital firms and funds have their processes for applying for venture capital funding. In broad terms, startup founders must fill out an application, pitch their business idea, and then exchange equity for venture capital.

How Do Startups Get Funding?

Startups can get funding through self funding, small-business loans, angel investments, and venture capital.

What Is Mezzanine Financing?

Mezzanine financing is a hybrid of debt and equity financing that allows lenders to convert the debt into equity in the company they lend to.

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