Not As Easy as A-B-C.
Despite frequent mentions in news media, increasing popularity among celebrities, and prevalence in pop culture, Venture Capital is widely misunderstood by the general public—and even by many aspiring entrepreneurs.
Movies like the Social Network (2010), a dramatization of Mark Zuckerberg’s story and how the Harvard drop-out founded Facebook, can give audiences the impression that taking an idea from early-stage investment to multi-billion dollar valuation is easier or more commonplace than it truly is.
End-consumers, however, don’t get to peek behind the curtain as VCs do. They’re not exposed to the millions of failed business plans each year—they only get to see the small percentage that makes it to market.
This phenomenon can be likened to working at a lottery office and assuming that everyone who buys a ticket wins because everyone who walks through your door is a lottery winner.
Compound these general misconceptions with the human tendency to become blinded by our own ideas and become overconfident, and you’ve got a real recipe for disaster.
What do I mean by disaster? Well, just about everyone thinks they have the next billion dollar idea that will change the world.
There’s a Reason Why They’re Called “Angels”
The large majority of VCs don’t even fool with seed funding, due to the incredible amount of time and manpower it takes to review thousands of bad business plans and pick out the good ones. It’s a tedious, rigorous process that has a very low chance of creating a good ROI for the PEI.
In a sense, it’s a lot like sifting through thousands of tons of dirt just to find a few specks of gold.
So, for those of you drawing up sketches of your new battery-powered backscratcher or calling manufacturers to produce prototypes of your on-the-go popcorn maker, you might want to save your sales pitch for Angel investors (or your next appearance on Shark Tank).
Series funding, on the other hand, is for thriving businesses that need capital to take things to the next level. They’ve proven themselves as a force to be reckoned with, supported by a loyal user base, a great business model, and a fantastic product.
The only things they lack are capital, expertise, and guidance. Fortunately, these three missing pieces of the puzzle can be filled by outside help.
Regarding the topic at hand, knowing which series of funding you should pursue comes down to proper self-evaluation and analysis of where your company stands in the growth stage.
Go ahead and check out the following list to see where you fit in:
Seed & Angel
The first round of funds raised by a startup is referred to as the seed stage. Depending on the amount of equity given in exchange for funding and a variety of other factors, deal sizes can vary from tens of thousands of dollars to a couple million.
Capital raised in the seed stage is generally invested in R&D for the product with the end goal of obtaining a patent. This is extremely risky for PEIs, as many entrepreneurs fail to get their product to market or even get a patent for it.
In the seed funding stage, Angel Investors and “micro VCs” are most active, providing relatively small amounts of capital in exchange for a good amount of equity. The large majority of VCs, however, don’t usually get involved until Series A.
Typically, 10% – 25% of equity is given to investors in the seed funding stage.
As its name might suggest, Series A is the first round of significant funding that comes after the Seed stage.
Once a startup has successfully built up their user base, Series A funding is used to gain additional traction and further product development efforts. Companies pursuing Series A funding typically have a valuation of $15 – $30 million at the time of the fundraising.
After issuing common stock and stock options to employees, founders, angels, and other early-stage investors, the Series A funding round begins.
While the major players in this series of funding are typically VCs, it’s not uncommon to find Angels dabbling in this area as well.
Due to increasing VC activity in recent years, median deal sizes—along with Series A—have risen across the board.
The average Series A deal size is $10.5 million.
“B” is for build.
At this stage in their lifecycle, a startup has discovered a profitable business model and has begun to hit their stride in regards to product-market fit.
With an effective blueprint in hand, a startup seeking Series B funding simply needs the capital to move forward—past the development stage.
In other words, the startup has already built the engine to move forward and seeks the fuel to make the engine run.
In some cases, Series B funding may even be used to explore different markets and revenue streams.
Primarily, you’ll be dealing with VCs and late-stage VCs.
The average size of a Series B deal is $24.9 million.
Series C & Beyond
On average, Series C funding rounds are valued at around $50 million. However, there’s technically no limit to the size of a Series C funding round.
Series C funding is used for large-scale growth, such as M&A (Mergers and Acquisitions) and international expansion.
Until a company goes public and releases an IPO, Series C rounds are raised for continued growth. In recent years, many private companies have chosen to stay private and continue raising funds rather than go public.
Late-stage VCs, Private Equity firms, and Investment Banks are the big players at this stage.
While the lines may blur a bit between each series of funding, the key players and amount of funding involved in each series, as well as the lifecycle of the startup, help create the distinction between Series A, B, and C.
According to the stats, 9 out of 10 startups fail. This is why VC & PE groups tend to stay out of the seeding stage and focus on Series B and C funding where the chances of picking a winner are higher.
And as the data shows, startups that secure Series A funding are much more likely to continue passing milestones and securing Series B and C, as well.
At Apogee Accelerator Group, we specialize in helping promising companies flourish and getting them to the next series of funding. As a business, we deal with two stages: taking companies from $10 million to $100 million, then from $100 million to $1 billion in valuation.
To learn more about Apogee Accelerator Group and the services we offer to founders, please visit our page.