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From Pre-Seed to Series D: Startup Funding Rounds Explained

From Pre-Seed to Series D: Startup Funding Rounds Explained

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Start-ups Funding Rounds

It is often said that “There’s not a lot of ‘fun’ in funding.”

Raising equity funding for your startup is a long, difficult, and often demoralizing process. However, if you are successful, you walk away with money that will help your startup grow and become everything you hope it could become.

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Startups don’t just raise a lump sum of cash or get a startup business loan and then be set up for life. In fact, the number of times startups are going back to the market to raise more capital has been growing. Each of these raises is known as a ‘funding round’. So, when you hear discussion of Series A, Series B, Series C or D funding rounds, these terms are referring to the processes of growing a business through outside investment.

How Funding Works: Before exploring how a round of funding works, it’s necessary to identify the different participants. First, there are the individuals hoping to gain funding for their company. On the other side are potential investors. While investors wish for businesses to succeed because they support entrepreneurship and believe in the aims and causes of those businesses, they also hope to gain something back from their investment. For this reason, nearly all investments made during one or another stage of developmental funding is arranged such that the investor or investing company retains partial ownership of the company; if the company grows and earns a profit, the investor will be rewarded commensurate with the investment made.

Pre-Seed Funding: The earliest stage of funding a new company comes so early in the process that it is not generally included among rounds of funding at all. Known as “pre-seed” funding, this stage typically refers to the period in which a company’s founders are first getting their operations off the ground. The most common “pre-seed” funders are the founders themselves, as well as close friends, supporters, and family.

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[Read Also: 5 subject areas to develop Nigerian youths]

Seed Funding: The very first money that many enterprises raise, whether they go on to raise a Series A or not, is seed funding. You can think of the “seed” funding as part of an analogy for planting a tree. This early financial support is ideally the “seed” which will help to grow the business. Given enough revenue and a successful business strategy, as well as the perseverance and dedication of investors, the company will hopefully eventually grow into a “tree.”

Seed funding is used to take a startup from idea to the first steps, such as product development or market research. Seed funding may be raised from family and friends, angel investors, incubators, and venture capital firms that focus on early-stage startups. Angel investors are perhaps the most common type of investors at this stage.

This is also the end point for many startups. If they cannot gain traction before the money runs out (also known as running out of runway), then they’ll fold. On the other hand, some startups decide that they are not interested in raising more money – that the level they reach with seed money is good enough or that they’re able to grow more without more investment and choose to stop raising funding rounds at this point.

Series A Funding: Once a business has developed a track record (an established user base, consistent revenue figures, or some other key performance indicator), that company may opt for Series A funding in order to further optimize its user base and product offerings. In this round, it is important to have a plan for developing a product that will generate long-term profit.

[Read Also: Become a “rich salary” earner today by following these simple steps]

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In Series A funding, investors are not just looking for great ideas. Rather, they are looking for companies with great ideas as well as a strong strategy for turning that idea into a successful, money-making business. For this reason, it’s common for firms going through Series A funding rounds to be valued at up to $15 million.

By this stage, it’s also common for investors to take part in a somewhat more political process. It’s common for a few venture capital firms to lead the pack. In fact, a single investor may serve as an “anchor.” Once a company has secured a first investor, it may find that it’s easier to attract additional investors as well. Angel investors also invest at this stage, but they tend to have much less influence in this funding round than they did in the seed funding stage.

It is worth noting that you may also hear about “Series AA”. This comes from a 2008 Y Combinator simplified set of Series AA Preferred Stock financing documents, which helped streamline early stage equity investments from angel investors. So, while sounding like a Series A, Series AA refers to a seed round from angel investors or a VC seed fund.

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Every investor looks for something different, but there are several universal metrics potential investors use to measure a startup, including:

  • Product/Service Evaluation. Can the team satisfy market needs? Does the venture have users/consumers, and is it receiving positive feedback from them?
  • Market Awareness. What is the target market demographic of the company? What is the ideal customer? How do they behave? Is the market large enough to support the company, or is there an exit strategy in place?
  • Competitor Assessment. Who are the direct competitors of the company? Indirect? What differentiates your company from theirs?

[Read Also: Strategies to Reduce Expenses and Save Money]

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A company going into Series A funding needs to be prepared to answer these questions and more about their own strengths and weaknesses. Every case is different.

Series B Funding: Series B funding is like Series A in some ways. The differences between the two rounds of funding are the scope of the venture and the amount of capital raised, as well as the solidification of serious expectations set forth by investors.

A startup that reaches the point where they are ready to raise a Series B round has already found their product/market fit and needs help expanding. The big question here is: Can you make this company that you’ve created work at scale? Can you go from 100 users to a 1,000? How about 1 million? The expansion that occurs after a Series B round is raised includes not only gaining more customers but also growing the team so that the company can serve that growing customer base. At this stage, it is no longer possible for the founder to “wear all the hats,” so raising enough money for competitive salaries is essential.

Series C Funding: Businesses that make it to Series C funding sessions are already quite successful. These companies look for additional funding in order to help them develop new products, expand into new markets, or even to acquire other companies. In Series C rounds, investors inject capital into the meat of successful businesses, in an effort to receive more than double that amount back. Series C funding is focused on scaling the company, capturing significant market share, acquisitions and growing as quickly and as successfully as possible.

Companies that make it to the Series C stage of funding are doing very well and are ready to expand to new markets, acquire other businesses, or develop new products. Commonly, Series C companies are looking to take their product out of their home country and reach an international market. Series C is often the last round that a company raises, although some do go on to raise Series D and even Series E round — or beyond.

[Read Also: A look at some financing options for small business owners]

When companies make it to this stage, their valuation is typically around $100 million.

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Series D Funding: A series D round of funding is a little more complicated than the previous rounds. As mentioned, many companies finish raising money with their Series C. However, there are a few reasons a company may choose to raise a Series D.

  1. They have discovered a new opportunity for expansion before going for an IPO, but just need another boost to get there. More companies are raising Series D rounds (or even beyond) to increase their value before going public.
  2. The company hasn’t hit the expectations laid out after raising their Series C round. This is called a “down round,” and it is when a company raises money a lower valuation than they raised in their previous round.

A down round may help a company push through a tricky time, but it also devalues the stock of the company. After raising a down round, many startups find it difficult to raise again, as trust in their ability to deliver on their promises has eroded. Down rounds also dilute founder stock and can demoralize employees, making it difficult to get back ahead.

Conclusion

Understanding the distinction between these rounds of raising capital will help you decipher startup news and evaluate entrepreneurial prospects. The rounds of funding work in essentially the same basic manner; investors offer cash in return for a stake in the business. Between the rounds, investors make slightly different demands on the startup.

Company profiles differ with each case study but generally possess different risk profiles and maturity levels at each funding stage. Nevertheless, seed investors and Series A, B, C and D investors all help to nurture ideas to come to fruition. Series funding enables investors to support entrepreneurs with the proper funds to carry out their dreams, perhaps cashing out together down the line in an IPO.

Beyond the basics of having a great idea with great potential, impressive traction to date and all, keep in mind that nothing will take the place of a compelling business opportunity, the proven ability to execute and the right team. That all said, you need to also position yourself to be noticed and then believed in by the right people. Who you know and what experiences you’ve had along the way will be key in establishing this positioning. Ask for introductions, attend conferences, build your circle of people that can help you directly or indirectly.

Patricia
1 Comment

1 Comment

  1. Tajukola

    July 15, 2019 at 3:31 pm

    Thanks. The Preamble looked Nice But further Illustrations and Example of Successful Companies that adopt it is Necessary for Conviction !

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Career tips

Great tips for landing a job during this lockdown

The coronavirus pandemic has had its impact on job opportunities, but here are some tips for landing jobs.

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Some tips for landing a job during this lockdown

The economic lockdown and movement restrictions due to the coronavirus pandemic has had an impact on job opportunities. Some of them could be in the form of job losses, getting new jobs, or even changing the way we work.

Given the unemployment numbers especially in these challenging times, it might be hard not to be apprehensive.

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According to a report from Bloomberg, Mark Hamrick, senior economic analyst for personal finance website Bankrate.com, said, “It’s important to remember that there is hiring happening. There’s always attrition and individuals leaving for other jobs.”

Robin Ryan, a career counsellor, said that just a few unemployed people are job hunting at the moment. Most believe that there are no jobs, they can’t be hired, or that only lower-level jobs are available.

Here are some tips for landing jobs during this lockdown.

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Beat the system: Make a list of your recent jobs and your top accomplishments at each of them. Those are the items that should be on your résumé. To get past automated applicant vetting systems, enter your work tasks—budgeting, project management, graphic design, team leadership, etc.—in the first bullet point under each job. Don’t include extraneous formatting, such as text boxes, tables, footers, or headers, because application software can’t recognize it.

(READ MORE:Skills Africa needs for sustainable development)

Assess your prospects: You have to find out if the opportunities in your industry are shrinking. According to Hamrick, “many people fail to see that their skills might apply to a variety of settings.” Consider some of the sectors that have stayed open in the lockdown—finance, real estate, food and other consumer goods, technology, and retail, plus suppliers and distributors for each. If that exercise doesn’t yield much, think about how your skills might help companies sharpen their online business. “There’s a need for people to help facilitate digital transformation,” Hamrick says.

Some tips for landing a job during this lockdown

Hit up recruiters (Recruiting agency firms): Let them help you with your resume and offer suggestions about things you might do to stand out.

Use your resources: Companies are filling positions needed to support virtual workers as part of their pandemic strategies. Many company websites might not yet reflect these changes, so try popular online job search websites, type in a company and your city, and you’ll get a better sense of what kind of hiring is going on.

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Network: That friend-of-a-friend who previously ignored you. He’s home now and might be up for a quick Zoom coffee date. Connect with everyone you know in your field. (LinkedIn is good for this.). Those connections build on each other. You can ask mutual acquaintances to introduce you to people who can help and once that happens, you can fix a virtual coffee date. If that goes well, ask for an introduction to a hiring manager or supervisor. You’ve got nothing to lose.

 

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Patricia
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Career tips

Millennials changing the definition of work; doing the most with freelancing

Given the numerous number of changes in today’s world, millennials are gradually changing the definition of work, and beginning to embrace freelancing.

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Millenials, Freelancing

Given the numerous changes in today’s world, millennials are beginning to embrace freelancing. It is not just about thinking outside the 9-5 work hours, they are gradually changing the definition of work. This signals a new relationship between the worker and the economy; it is not just where they are working. It is what they are working for.

Millennials do not see companies as salary machines and do not also see themselves as ‘another chair-filler’. They actually see themselves as having the power to make choices, and their decision to work in one place or another is about finding value, not just the luxurious life attached to a conventional job.

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[READ ALSO: Nigerian Millennials have figured where to invest their money]

How Millennials make the most of freelancing

Skills over degree

Nearly half of millennials have tried freelancing, and nearly three-quarters of freelancers say it is getting easier to find work. Most millennials begin their journey into freelancing by discovering their passion and finessing their skills in order to look unique. They often find time to develop themselves outside the scope of their disciplines by attributing more values to skill acquisition than conventional degrees. With unique skills like photography, graphic design, content creation, etc. millennials are able to make enough money to pay their bills and afford their lifestyles.

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Working Remotely

Millennials are taking advantage of working remotely. Working remotely affords millennials the much-needed flexibility they need in their daily routines. Working remotely also helps improve the productivity of millennials, unlike conventional workers. This way, they are free from distractions that cannot be taken care of. It is amazing that working remotely can have millennials working straight for 8 hours without thinking of food or break.

READ ALSO: Tech Startups should emulate Konga – EX Unilag VC

Gigs rather than restrictive job functions

Millennials use freelancing as an opportunity to harness their creative abilities rather than focusing on restrictive job functions. Millennials get certain jobs called side gigs which can help them explore their creativity. They figure out who their clients really are and what they want from them. More importantly, is that millennials find an untapped market and then quickly build a huge customer base on it which will be making enough cash in short notice.

Networking for Growth

Gone are the days when business cards were fashionable. This is because people do not really remember business cards. Millennials use networking as a way of getting to know the persons behind the business. They look for a spark in any conversation that a relationship can be built upon. Also, through the use of social media platforms, millennials are also able to collaborate to ensure the growth of the freelance economy.

Millenials, Freelancing

[READ ALSO: Millennials are becoming parents and school fees are getting more expensive]

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Conclusion

Finding a freelance platform that affords skilled professionals flexibility and opportunities to grow is a concern for millennials. TERAWORK is a highly recommended freelancing platform that provides freelancers with an opportunity to work on flexible schedules, get rid of the daily commute process and have a perfect balance between work and professional life; not only because it affords local and international millennials opportunities to harness their skills, but the platform also allows these skilled individuals to showcase their past work experience and provide them with the access to new jobs every day.

Patricia
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Career tips

12 lessons on business strategy from the game of Chess

Are you a chess player? Well, not a lot of people are. Therefore, if your answer is no, you really need to try it. After all, it is called “the game of kings and queens” for a reason.

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game of Chess

Are you a chess player? Well, not a lot of people are. Therefore, if your answer is no, you really need to try it. After all, it is called “the game of kings and queens” for a reason.

Chess is a board game that has been around for centuries. It has to do with the art of war. It’s all about strategy, tactics, and the ability to outmaneuver your opponent; the final aim being to checkmate them (that is, capture their king). Once that happens, the game is over.

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Chess has been shown to:

  • Improve IQ
  • Build confidence
  • Improve problem-solving skills
  • Teach planning and foresight
  • Improve concentration
  • Exercise both sides of the brain
  • Improve memory
  • Enhance creativity

It’s quite obvious that these benefits are indispensable when it comes to successfully running a business; especially if you are in a highly competitive market.

What goes on in the game is the perfect metaphor for business competition. In fact, you can learn a thing or two by playing chess. These lessons will prove very useful to you if you are an entrepreneur trying to plant your feet and control considerable market share. It will surely improve your ability to make sound business decisions.

[Read Also: CWG confirms Adeyipo’s appointment as MD]

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No wonder you can find a Chessboard in the home or office of top CEOs (Bill Gates, Peter Thiel), world leaders (Barack Obama, Bill Clinton) and even famous TV personalities (Arnold Schwarzenegger, Julia Roberts of Pretty Woman).

How does playing chess relate to running a business?

The parallels between chess and business are clearly evident. The game is about war; specifically about protecting the invaluable piece (the king), and outthinking the opponent who’s trying to defeat you.

There are different strategies for both offensive and defensive play, and the best chess players should have experience with both. As a business person, you need to successfully navigate defensive and offensive positions in your industry.

If you’ve seen people play chess, or maybe you play, you’ll notice that the opponents patiently wait their turn, study the board, anticipate their next move, and go through potential scenarios in their head. This is not so different from what is obtainable in the business world.

Both are based on SWOT analysis. That is, recognizing your Strengths, Weaknesses, Opportunities, and Threats.

Chess also involves an opening, a middle game, and an endgame. This is quite similar to the business cycle (expansion, peak, contraction, and trough).

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What lessons does chess teach?

To play the game you first have to master the rules, understand the players, and ultimately, play to win.

  1. Master the rules

Before you can take part, you have to learn the rules. That’s also the way it is in business.

If you jump in without first understanding the dynamics of how things work, including consumer demand, market regulations, pricing techniques, and what have you, you are most likely headed for failure. That is why it’s important to start small and grow gradually, expanding your reach as you get more experienced.

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  1. Understand the players

Just like in chess, you need to understand your competition if you want to succeed in business.

Chess players spend time studying how their opponents think. This way, they can device countermeasures that will enable them to stay ahead, withstand an attack, and make a counter-attack.

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That’s exactly what you need to do as an entrepreneur. Learn what your competitors are doing. Who are they? What are they offering consumers that you are not? How can you make your products, services, and marketing efforts better? These and many more are important questions you have to ask yourself.

  1. Play to win

In chess, you have to keep the ultimate goal in mind. If you play emotionally or succumb at the first signs of hardship, you won’t win. You have to be ready to make tough choices.

[Read Also: 46-years after, Mr. Bigg’s is not so big anymore]

Some people play conservatively. They hang on tight to their pieces and refuse to make sacrifices. That’s also the way it is in business. To achieve your goals, you have to stay flexible. Know when to make adjustments, whether in your product combinations, management techniques, or marketing efforts.

Always keep your eyes on the big picture.

  1. Don’t rush to make a move; there might be a better one.

Inexperienced players stop searching for a move once they’ve located a good one. They forget there might be a better one.

In business, you have to make sure you make choices based on the complete set of information from the whole landscape. Don’t jump into the first option that looks good. Consider all your options.

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  1. Plan several moves ahead

Chess players plan their moves and consider potential responses to those moves. Experienced players foresee moves several turns ahead. That’s how they manage to outwit their opponent.

[Read Also: Entrepreneurship isn’t all that glamorous – Jason Njoku]

This is what you must do as an entrepreneur. Making a good forecast is crucial to business success.

You also need to device contingency plans for situations that may arise in the future. “We’ll figure it out when we get there” might be a risky proposition you won’t be able to afford.

  1. Don’t play the plan; play the board

When playing chess, your opponent constantly devices measures to undermine your plans.

While it is important to make plans, it’s even more so to know when to abandon them or simply make adjustments.

While you have your business strategies in place, competitors are also applying their own to capture more market share than you do. Your aim should not be to follow a rigid set of plans. What determines your success or failure is your ability to adapt well and on time and respond effectively to counter what your competitors are doing.

  1. Know the value of the pieces

Each chess piece has a specific value. By knowing them, you are better suited to make decisions on how to place them across the board.

Similarly, when you know the value of your employees, customers, and associates, it will be easier to make wise decisions regarding job responsibilities, consumer targeting, and many more.

[Read Also: It’s time to break Nescafe’s two-decade grip on Nigeria’s coffee market]

  1. Manage your resources

To win, learn how to manage your resources.

In business, this applies to cash. If you run out of cash, you are done. You need to make sure you are not overspending. Every single expense you make should earn profit. Nothing should be wasted. You also need to ensure you are raising money appropriately as you go. Your expenses should never exceed your revenue.

  1. Keep an eye on the clock

“Time is material” – this is a common saying in chess.

You not only have to manage your pieces, you also have to manage time.

In a tournament setting, the games are timed so you have a limited period to make a number of moves.

It doesn’t matter if you are beating your opponent on the board, once you run out of time, you lose and your opponent takes the game, although you were doing exceptionally well on the board.

To prepare, players spend months or even years memorizing potential strategies and moves. This way, they can recall at a moment’s notice the move they have to make so they won’t spend too much time thinking.

This is why it is important to prepare in advance. A wise entrepreneur can make decisions which appear to be quick, but in reality, are a result of months of study and preparation.

  1. Make sacrifices

In chess, you learn to make necessary sacrifices that will give you the upper hand, or enable you to capture the king (Checkmate!). There are situations where you have to offer up a piece with intentions of gaining an advantage later on.

  1. Learn the value of patience

Before you can attack effectively, you have to take time to place your pieces in effective positions. A premature attack might backfire. The same idea is obtainable in business. Avoid making rash moves. Only make a move when everything is in place. For instance, don’t be in a hurry to start a business or launch a new product before conducting market research, no matter how excited you are about it.

  1. Create a balance between skill and intuition

There’s a balance in chess between intuition and analysis. There is always a human element that can’t be replaced by months or years of study and preparation. Chess is an infinite game with millions of possible moves. Therefore, it’s not possible to know and plan for every contingency. There are moments when you have to make a move based on intuition.

Once a player finds the balance between intuition and skill, their game improves remarkably. Many great chess players have come out on top a number of times when they went with their gut rather than their skills.

As an entrepreneur, you need to find this balance. It is what thinking outside the box is all about. It is also the key to creativity and great achievements and may be the difference between success and failure. Be it unique marketing campaigns, new and unique products and services, and other products of intuition.

In conclusion,

If you want to succeed in business, you have to be ruthless. This is exactly what chess is about.

Patricia
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