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How to start a business with seed funding? SEED FUNDING rounds, from pre-seed funding to IPO

Updated: Aug 31, 2021

EUREKA! You’ve come up with an idea that could change the world. Seeing the potential of your idea on the market, you could very well become the next Steve Jobs! You outline your vision with a great partner (just like JP & Kevin, Auxo’s co-founders), come up with a killer name and design an awesome logo. Now you are ready to launch your business and start making some money! Well… maybe not quite. Whether your idea is still in the development stage or already validated, one element is quite essential for your survival and your growth. And we all know it takes money to make money! 

In this article, we will explain the process to finance your project: how does seed funding works, what are different funding rounds, what’s the difference between Series A, Series B, Series C etc.… all the way to the final stage of Initial Public Offering (IPO). We will also shed some light on all the people involved during each step of the process.

Understanding every funding stage, differences between pre-seed, series A, series B, series C... and IPO
Seed funding: How it works

Definition: a seed investment (or seed funding, seed money, seed capital) refers to the type of financing used in the lifecycle of a start-up.

1.  Pre-seed funding

This is the earliest stage of funding. Pre-seed funding is generally a small investment made by the founders, their friends & family, or a small third-party investor to help the start-up building their product for their first public release. It will enable the founders to establish their operations & further develop their idea (product or service) by doing market research, R&D, prototyping, even hiring their first key players!

As a rule of thumb, the higher the risk, the higher the reward. Pre-seed funding is no exception to that, as pre-seed rounds are a high risk for investors. This is due to the small survival rate of start-ups under 2 years of age; if the start-up does not survive, investors will not see a dime back of their money invested. That is why their initial investments are so small. However, sometimes the Angel investors step in; a “high-net-worth individual who provides financial backing for small start-ups or entrepreneurs, typically in exchange for ownership equity in the company” (Source: Investopedia). They usually invest in a bigger percentage of the company at a great price if they are convinced that the idea will succeed. Angels are usually more convinced by the people behind the product and their talents rather than the business plan itself, which can evolve easily.

Another type of help is provided by a start-up accelerator or seed accelerator. “Startup accelerators support early-stage, growth-driven companies through education, mentorship, and financing, for a fixed-period of time” (Harvard Business Review). This is a source of finance and other services to help new businesses get established and cover some of their initial costs that start-up founders cannot provide themselves (Source: Brex). This type of investment allows founders to mitigate the risk. 

2.  Seed funding

This is the first official equity funding stage. It will bring in the money, anywhere from $100k to a couple of million dollars, so that the start-up can start taking off! This money will allow the founding team to enter the market and test their idea. Seed rounds are still high-risk but the more money you get, the less risky it becomes. At this point, more Angels are likely to invest, along with incubators, as well as Venture Capitalists (or VCs).

A venture capitalist is a “private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. This could be funding start-up ventures or supporting small companies that wish to expand but do not have access to equities markets” (Source: Investopedia). We are usually talking about 1M to 2M dollar range investments. Things are getting serious now and most companies who get a seed funding round are valuated at a couple of $M (3 to 6).

3.  Series A funding

Once the start-up gets a significant track record, grows, and becomes in need of bigger investments, a Series A funding round is made to raise more money in order to establish the start-up in the long term.

To do this, having a long-term profitable business plan & a strong strategy is crucial. For start-ups, it may take anywhere from a few months to a few years in order to get a Series A. The wait is often worth it though, as the average Series A funding was $15.6M in 2020. At this point, Angels are starting to move away while there are more and more VC firms. On average, less than half of seed-funded start-ups will benefit from a Series A.

4.Series B funding

This round is all about building the company and taking the business to the next level. The estimated average money raised during a Series B round is somewhere near $30M. Now with that amount of money, the start-up (which is not really a start-up anymore) can bring its idea to a much bigger scale. This requires building a strong team that can help the company grow. Now, finding the right talent can be hard, and quite costly. To help with this, we’ve included a link to go over how to find new employees and the types of agencies that can help you.

Regarding the main players here, they usually are the same as in Series A with VC firms mostly but there are some late-stage investment-focused VC firms that can also pop in. While this helps financially, it is good to keep in mind that each new investor will further dilute your company, and you usually have a larger number of shares (which is not always a bad thing).

5.  Series C funding

We are now moving on to additional funding stages, also meant to develop the business (to keep the expansion phase going). Series C is one of them, with the additional Series D, E, F... etc. We are going to review those Series as one group because they do have a lot of similarities. The range of capital raised is huge, sometimes going from $50M to billions of dollars! They are generally used for large-scale business operations, such as the buyout of competitors, developing new products, expanding the business worldwide…etc.

Going to more rounds usually means seeing fewer and fewer VC firms, but more and more financial institutions such as banks & private equity firms. The reason for that is simple: the risks associated with the business are much lower, so more players start to invest, which explains also why the amount of the capital raised can be as high as it is.

6.  Exit

Eventually, all these rounds end, which leads us to 2 exit doors: being bought by a huge company (like the GAFAS for example) or offering it to the stock market through the Initial Public Offering, much known as IPO.  An IPO is the “process of offering shares of a private corporation (like the start-up) to the public (like yourself) in a new stock issuance. Public share issuance allows a company to raise capital from public investors.” That is why we call it going public!

And that’s a wrap for seed funding 101. You're a pro now.

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