Types Of Startup Funding Rounds

Marcin Laczynski Partner, Next Road Ventures
types of startup funding rounds

Investments in tech startups are skyrocketing. Probably you’ve seen countless headlines about companies receiving a bunch of money from investors. And as the amount of available venture capital money is at its historic high, no wonder you probably consider fundraising as well. Who wouldn’t, right? 

To help you keep on track and not to get lost among all this buzz, below we share some insights on the fundraising process; to be more precise, types of funding rounds. Bear in mind these are just guidelines - precise setups may vary from country to country, ex. US market or Western Europe has much higher financing rounds than countries in Central & Eastern Europe; also, characteristics of particular round types constantly evolve.

Let's get started.

What is a funding round?

A funding round is money you get to grow your business from different types of investors - usually accelerators, business angels and VC funds. Depending on the development stage of your startup, you can raise pre-seed, seed, series A, B, C, etc. explained below.

Pre-seed round

Pre-seed funding round is a way of financing that aims to take startup idea off the ground – enable to engage in the project full time, hire crucial team members, build a proof of concept (POC), prototype or minimum viable product (MVP), prepare a go-to-market strategy and get some initial traction needed for raising the (next) seed investment round.

Product stage: mock-ups, demo, prototype, MVP
Round size: depends on the startup location, from 50k up to 1M EUR
Funding sources: bootstrapping*, family and friends, accelerators, business angels, public grant, crowd

*bootstrapping means starting the business without external money and maximizing all available resources - working overtime, taking a second job, generating revenue through consulting services, using credit cards, including not paying your rent but we don’t recommend that!

Seed round

Seed round takes place when a startup has established: a proof of concept, a demo / MVP, strategy on how to enter the market and/or initial traction. Seed investment is commonly used for further product and team development, official market launch, acquiring customers and testing product-market fit & a business model (revenue generation). The seed round is usually led by business angels and early-stage VC funds.

Product stage: MVP, beta, product launch
Round size: from 250k up to 5M EUR
Funding sources: accelerators, business angels (including business angel syndicates), seed funds, VC funds, public grants, crowd

Post-seed / pre-series A / early A round

Post-seed / pre-series A / early A take place when a startup already has a product-market fit, generates revenue but needs additional money for marketing & sales and to figure out effective customer acquisition strategy that will deliver solid metrics needed to land series A investment. To hit round A startup needs 1M EUR in ARR (annual recurring revenue).

So sometimes, in between the seed and series A financing, startups require some additional fuel to deliver better metrics needed to land a series A investment. It also happens that using pre-A financing startups want to boost growth in order to reach a better valuation. However, in most cases you will find yourself in a post-seed / pre-series A round if your team has just fallen short from hitting the milestones you hoped for with the seed capital and requires some additional funding to stay on track. The reason for this underperformance may vary but in most cases, they are delayed product development, recruitment or issues around customer acquisition.

So if you are looking for pre-A financing, you probably have what it takes to raise an A round but you have a strong hunch that, if you just hit a few more milestones, you will have good leverage to negotiate better terms. From an investor perspective, pre-A companies have a very interesting value proposition as they display traits similar to A round companies at a discount.

Product stage: product on the market, product-market fit
Round size: 250k-1M EUR
Funding sources:business angels, seed funds, VC funds, public grants, crowd

Series A Round

Series A funding round (also known as series A financing or series A investment) is the next fundraising round after seed investment. It takes place when a company has: an established product-market fit, solid unit economics, valid and adaptable business model that can be quickly scaled, moreover it should generate revenue (preferably 1M EUR in ARR) and be able to boost market growth by additional funding. Usually, A round is led by VC funds.

Product stage: ready product, proved product-market fit
Round size:1M-10M EUR (and each year it’s getting higher, in the US can exceed 50M USD)
Funding sources: mainly VC funds, business angels

Series B Round

Series B is the funding round that takes place at the stage where the company has already developed a significant user base and a proven business model. Round B aims to build on the existing success and scale rapidly. Raised capital is usually used for team growth, marketing and geographic expansion. European B rounds are led by bigger VC funds, usually starting at €5 million and can be as high as €20 million.

Product stage: mature product
Round size: 5M-50M EUR (and growing)
Funding sources: VC funds, Private Equity funds focused on tech companies, corporates

Series C & beyond

Series C and beyond are funding rounds that support mature companies in further development and scaling. At this stage the business model works, the user base expands further, the company is ready to conquer new markets, develop new products and acquire other companies. At this point, the company is most likely valued over €100 million and can be on the fast track to an exit or at least significantly enlarging market share, as one of the later rounds' main objectives is rapid and efficient scaling. At this stage the business is de-risked enough for financial institutions to involve themselves in investment. Apart from large VC firms – series C are led by PE funds, banks, hedge funds and corporates. From this stage, one of the most probable outcomes is IPO or acquisition by a bigger player.

Product stage: mature product, new products, acquisitions
Round size: 20M-70M EUR
Funding sources: VC funds, Private Equity funds focused on tech companies, corporates

Startup Funding Rounds In CEE
Startup Funding Rounds In CEE

The common belief of easily accessible private capital has encouraged a myriad of entrepreneurs to take on the challenge of putting their business ideas into practice and securing investment from business angels or VC funds has become the growth financing strategy chosen by the vast majority of startups.

Yet, you don’t raise a sum of money and you are set up for life. In, fact as a startup founder, in most cases you will have to come back to the market a couple of times more to support different stages of your startup development. So aiming at leading a high-growth and cash-intensive business you have to be prepared that fundraising will lock up a serious portion of your time.

Looking for investors? Download PERFECT PITCH E-BOOK and learn how to prepare Investor Deck, Elevator Pitch & Competition Pitch that will get your startup funded!

Related Posts:

VC Tips For Successful Startup Fundraising (by Magdalena Balcerzak, Manager, Vestbee)

How To Create A Pitch Deck That Will Get Your Startup Funded (by Ewa Chronowska, Partner, Next Road Ventures)

How To Write Elevator Pitch For Investors (by Ewa Chronowska, Partner, Next Road Ventures)

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