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Series B, LBO, Seed Funding, IPO... you know exactly what these all mean right? Just in case you’re nodding knowingly but uncertainly we thought it would be a good idea to give a quick overview and explanation of the startup funding cycle, from initial investment all the way to exits.
The first thing to remember is the names given to funding rounds are fairly arbitrary. They are all effectively just money raising efforts and one man’s seed round could be another man’s Series A and the amounts of money raised in each step can vary wildly in each case. However, while there can be some blurring of the lines between definitions there are certain traits that generally represent each of these startup funding rounds, even if the descriptions below aren’t necessarily hard and fast rules.
Seed Funding
This is the money needed to get the business off the ground and generally the first capital a startup raises. The money could come from friends and family and may even be referred to as the "Friends and Family" round. More typically some of the seed funding will come from a wealthy individual unconnected to the founder known as an Angel investor. Seed capital can be received as a loan but is more typically given in exchange for equity in the startup. Loans will often be converted to preferred stock at the Series A stage. Founders can be giving away any percentage of equity, though it is generally less than 20 percent and amounts raised are usually between $250 thousand and $2 million.
Series A Investment
At this point most startups have a strong and defined idea of what the central goal is behind their product or service and may even have launched them commercially. It is also the stage at which Venture Capital firms usually get involved. The purpose of Series A capital is to bring the business to the next level, build a proper business plan, and launch or establish the product in the market. This funding is also often used to make up a shortfall in capital as even if the business is generating revenue it may not yet profitable. Amounts raised can be anywhere from $2 million to $15 million. Given the larger investment, generally more equity is given away at this stage too, but percentage will vary depending on the company and the capital involved.
Series B Investment and Beyond
By now a startup is becoming an established business — there is a product in the market and customer base — but further funding is required for expansion. The funds are needed for staff growth, expansion to new markets, acquisitions, etc. Amounts can be anywhere from $7 million to tens of millions, increasing again with Series C and beyond. Technically there is no limit to the number of rounds a startup can have, but there is a limited amount of equity to give away and investors will typically have agreements as to how much their stake can be watered down, which can determine the number of equity funding rounds a company can pursue.
Debt Funding
Once a startup is established it can raise money through a traditional loan or debt that will have to be paid back at some stage. This can take the various forms including venture debt, lines of credit from a bank based on revenue, debt raised using an asset as collateral or a loan guaranteed by another organization such as the SBA (Small Business Administration).
Mezzanine Financing & Bridge Loans
This is generally the last round of funding in the run up to an IPO, an acquisition, a management buyout or a leveraged buyout. This is usually all short-term debt lasting for six to 12 months designed to ‘bridge’ the gap until the IPO or buyout, the proceeds of which are used to pay back the debt.
Leveraged Buyout (LBO)
An LBO is simply an acquisition using a significant amount of borrowed money in the form of bonds or loans rather than cash. Often of the assets of the company being acquired are used as collateral for the loan which allows the buyer to make the acquisition without using much of its own capital.
Initial Public Offering (IPO)
An IPO is just another way to raise money, but this time from millions of regular people. The shares of the company are sold on a stock exchange like Nasdaq or the NYSE, allowing anyone to invest in the business. The IPO’s opening stock price is typically set with the help of investment bankers who commit to selling X number of the company’s shares at Y price, raising money for the company. Before an IPO investors including the founder hold restricted stock which cannot be sold for cash, but these shares are converted to unrestricted stock which can be sold immediately or at some point in the future.
There are, of course, other ways of raising money, many of which are too complicated to go into here, but this should give you an idea of what people are generally referring to when they speak about funding rounds. Just be aware that particularly for equity funding, the lines between rounds can blur and the monies involved are constantly growing, so use this as a guideline rather than a hard definition.
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