Feb 18, 2022
Seed Funding and A, B, C Series: Determining the Life Cycle of Startups
The firm's fundraising stages, which include pre seed funding, Series A, Series B, and Series C, are crucial to understanding where a startup is in the process. Significant milestones show the changes between the fundraising rounds. A seed round of funding is demonstrated by the development of a team and a product. Similarly, Series A, B, C, and other stages drive the growth and determine the life cycle of startup investment. Startup funding is influenced by the sector and the level of investor interest. An investment made during the startup's early stages is known as seed capital. It assists the company in determining and developing the ideal direction. The funds raised during the seed stage are utilized to learn about the needs and tastes and formulate a product or service accordingly.
A new business's initial round of funding usually happens so early in the process that it is routinely considered insignificant in subsequent funding rounds. The pre-seed funding usually refers to the period when a company's founders are just getting their operation off the ground. The founders, close friends, backers, and family members, are the most typical "pre-seed" financiers. This fundraising stage may go extremely fast or take a very long time, depending on the nature of the firm and the early costs associated with establishing the business idea. Investors, at this stage, are not making contributions in exchange for company shares. In a pre-seed funding stage, the startup founders are the main investors. A startup that decides to bootstrap or simply survives off of the goodwill of friends, family, and the depth of its own pockets, knows very well that it would be difficult to fulfill its aspirations without going into Series A, B, and C rounds. Series fundraising rounds are only the first steps in the process of developing an innovative business idea or model into a ground-breaking international business ready for an Initial Public Offer (IPO).
The formal equity funding stage begins with seed funding. It is usually considered the first official fund that a startup raises. Many startups prefer to stick to the seed funding round or Series A stage and do not want to go beyond this. The growth of the business seed fund is critical as it supports startups with necessary funds at the initial stage where important business components, such as market research and product development, determine further course of action. The characteristics of the final product, identification of prospective clients/customers, and demographics are determined once the new business gets seed funding. Moreover, the seed funding stage also helps establish a core team in the enterprise that is needed to execute plans and strategies to employ a founding team to complete these tasks.
Unlike the pre-seed stage, here, the potential investors' base widens and goes beyond founders, friends, and family. At the seed stage, incubators, venture capital companies, and angel investors play key roles. One of the most common types of investors participating in seed funding is known as angel investors, who tend to appreciate riskier ventures and expect an equity stake in the company in exchange for their investment. Startup investors usually consider seed round funding a high-risk proposal. However, they go for it as this stage has the potential to offer the highest return on investment compared to any other funding stage if the startups are successful.
The primary motivation for those who choose to invest during the seed financing rounds is the ability of investors to negotiate greater ownership of a firm than in later funding stages. Larger equity to funding ratio results from the difficulty in obtaining or generally low valuations at the seed stage of funding.
Some firms may never conduct a Series A round of investment because the owners believe that a seed funding round is all that is required to properly launch their business.
A small team is often scaled into a larger team capable of developing, producing, and selling at a higher rate during Series A investment rounds. A founding team, a proof of concept, and a solid track record of capital management from the prior round of fundraising are common characteristics of Series A startups. The Series A capital round is often used for employing staff, purchasing production equipment, and purchasing other items required to produce a product at a profit. A startup's value is typically determined at the Series A investment stage because there are a few critical measures that may be used to do so. Appraisers are better equipped to estimate the value of a Series A startup than a startup in the seed fundraising stage when they have access to a proof of concept, the concept of managing money with seed investment, and the startup's success.
Series B investment indicates that the product or service is marketing adequately, and the clients have started buying those products or services. Series B investment supports startups paying wage bills, investment in human assets, talent acquisition, and infrastructure development. At this stage, startups can aspire to establish themselves as global players. It is about taking enterprises to the next level from a development phase. Startup investors come forward to support them in moving to the next level by expanding their market reach. Startups that have undergone Series A and Seed fundraising rounds have established sizable user bases and shown investors that they are ready for success on a broader scale.
There is no set limit on the number of investment rounds a startup can get. Venture capital firms and other startup investors are, however, very careful about investment during the Series C stage. Even founders are a bit cautious as the number of investment rounds, the more release of the business' equity. While moving to the Series C stage, startups are believed to have achieved significant progress in their entrepreneurial journey. They seek additional investment to support the creation of new goods, market expansion, and even company acquisition. For startups, Series C funding is critical for expansion, scaling, and attaining a faster growth rate.
Usually, a startup will end its external equity funding with Series C. But, the Series does not end here, and some startups after attaining considerable success in terms of their growth would also prefer to try Series D and even Series E rounds. The primary aim is to go beyond Series C and prepare for an Initial Public Offer (IPO). As valuation is the key to a robust response for an IPO, many companies want to capitalize on the valuation of Series C and D funding for enhanced valuation purposes.
Startup India and Seed Funding
Startups in India are raising record funds. In the first half of the Calendar year 2022, nearly $19 billion was raised by Indian startups. According to an Inc42 report, this fundraising by Indian startups was the highest in nine years. In 2021, Indian startups could raise $10 billion in the first half of the year. India now has 104 unicorns, with 44 added in 2021. These Indian Unicorns have collectively raised over $93 billion, and their current combined valuation stood at $340 billion, as per the report. Startup India seed funding is witnessing robust growth despite geopolitical uncertainties. A Nasscom report reveals that startup funding has dropped by 17 percent to $ 6 billion on a quarter-on-quarter basis in the April-June period. Deals also witnessed a 17 percent decline in the same period, but despite a decline in deal value, funding in the growth stage continued to increase. Nearly 26 percent of the total startup funding went to the fintech segment. It is widely admitted that the Russia-Ukraine conflict has affected investors' sentiments in Q2 of 2022. However, seed and growth stage funding in India is getting close behind the US and China. It is noteworthy that in the first half of 2022, a large number of venture capital funds were announced, and General Atlantic, Elevation Capital, and Accel were among those who launched major funds for India. Out of the 78 total funds, 57 funds worth around $8.1 Billion have already been launched, with the biggest being Sequoia's India & SEA fund at $2 Billion.