Stages of Venture Capital Funding

The United States is one of the most innovative countries in the world. Our nation loves to hear about the against-all-odds startup’s success stories. These trailblazers are set on changing the lifestyle of our society. However, it is not without venture capital financing that these heroes can succeed. This post will discuss from the humble beginnings of a startup and the stages of venture capital funding. 

Andy Katz-Mayfield had a great idea after picking up a razor at a local store. For such a simple purchase, it was a bad experience. The blades were in a locked cabinet, which took him several minutes to find someone to open it. Besides the unattractive blister package, they were expensive. 

After sharing his experience with his friend Jeffrey Raider, the bad experience turned into an idea. What if they could sell a well designed, high-quality, inexpensive razor delivered to your doorsteps? And from that principle, eighteen months later Harry’s was born. And the rest is history.

It was because of venture capital financing and angel investors that their idea came to being. 

What is venture capital?    

Venture capital is equity financing provided by institutional investors. Funds for such investments originate from a pension fund or insurance companies. Or the investors own a proprietary pool of capital. Recently with the rise of crowdfunding, and other agglomerate companies, it opened doors for the masses to become angel investors.

Venture capital can be raised in stages or rounds. Stages are important because the investments interested differ depending on the phase. For instance, some investors prefer making an investment during the early stages — taking a much higher risk. Conversely, others prefer when the company is profitable. Each stage is unique in many different ways — risk, operation, profitability, return expectations, etc.  

Who should consider venture capital financing?

Many companies can use venture capital financing resources to accelerate growth. For startups with negative cashflow, venture capital is, sometimes, the only form of financing available. 

When a growth plan is in place, a new acquisition, product launch, etc., even profitable companies can benefit from venture capital. 

If you are seeking venture capital financing, it is crucial to match your company’s stage development with the appropriate venture capital sources. A startup seeking early-stage funds would pitch to a different set of investors than a well-established company. Thus, finding the right specialist to assist in raising the funds is essential.

How does funding work?

As previously mentioned investors are interested in different stages of businesses. Thus, funding works differently depending on the stage and round you are seeking to fund.  

Before any funding begins, your company must undergo a valuation. The valuations are derived from many different aspects — management, track record, market size, risk, etc. The results will indicate the maturity level of your company, and the growth prospect. All of these factors impact on the type of investors that are likely to get involved. Most importantly, the valuation will validate why your company is seeking new capital. 

Stages of venture capital funding

A company can raise funds more than once while at a specific stage. For instance, Harry’s completed its first seed round in August 2012. The second seed round was in March 2013, followed by a third one in May 2014. 

The stages of venture capital funding names might vary. However, most commons are:

Pre-Seed funding

In this stage, the company is still an idea and getting operations off the ground. The funders are typically the founders, family, friends, and supporters. In this phase, it is difficult to evaluate your company. The only thing you might have in place is the idea, and perhaps bits and pieces of a business plan. 

Additionally, the timing in this stage can drastically vary depending on the nature of the business, and the initial cost to get things started. According to Jeff Raider, Harry’s CEO, it took 18 months from the initial idea until the launch of the products. 

The pre-seed funding stage, investors are not making investments in exchange for equity in the company because most of the investors are also the founders. 

Seed funding

It is the first official equity funding of the venture capital financing stage. Think of the seed funding like planting a tree. You plant the seed and water. Hopefully, it will grow into a tree one day. 

In this round of funding usually involves less than $5 million. However, the company must have promising concepts and key customers. Organizations in this phase might not have cash-flow or break-even. This funding helps the firm to finance its first steps. Thus, the capital will be applied for market research and product development. 

Oftentimes, the seed fund allows the company to determine the final product, and the target demographic. The money will also be used to employ the founding team to complete these tasks. 

Unlike the pre-seed, in this stage of venture capital funding, many are interested. One particular type is angel investors, as they don’t mind riskier ventures. They do, however, expect some equity in the company in exchange for their investment. 

Also, in this phase, venture capital funds will not invest in companies outside of their geographic area; which is usually a 100-150 miles radius. They are also very involved with the founders and the management of operations.

For the Seed funding round, Harry’s raised $2.5 million. 

Series A Funding

Once the business has somewhat a track record. Meaning, they have established a customer base, or user base, consistent revenue, and other performance indicators. At that point, your company can opt for Series A funding. 

This round is focused to seize the opportunity to further optimize the user or customer base. It can also scale products across different markets. In this phase, your company must be developing a business model to generate long-term profit. 

On Series A rounds, a company can typically raise anywhere between $2 to $15 million. However, if the company is deemed to reach “unicorn” status, then this round can go much higher. 

Series A funding investors are not looking for ideas. They want to see a structured company, with a strong strategy and turning ideas into a money-making business. A firm in this round values up to $22 million. 

In this phase, investors are more politically inclined. Oftentimes, once your company finds an anchor investor, it is easier to find additional investors. Angel investors also invest in this stage, but they are more likely to take the back seat. 

The investors in this round are more traditional venture capital firms. Some of the most well-known are Sequoia, Benchmark, Greylock, and Accel. 

In recent years, companies are able to use crowdfunding to raise capital as part of Series A fund. The reason is, that while these companies might generate some cash-flow, they fail to attract interest among investors. 

Interestingly, fewer than half of seed-funded companies don’t make it to this phase. 

Series B Funding

In this stage of venture capital funding, it is all about taking the business to the next level, past the developmental stage. Companies that reach this phase, already have a substantial customer base and are ready for a larger scale. The Series B funding will help them meet the new demand.  

Companies that reach this far produce award-winning products, and it is trying to grow. In such cases, the organization needs a robust talent acquisition, with tech, sales, and advertising support. 

Additionally, a company undergoing Series B funding is well-rounded, and their valuations reflect those facts. 

The average evaluation of a business seeking Series B funding is $58 million. 

When it comes to investor interests, and key players, Series B is somewhat similar to Series A. It includes a key anchor investor that helps draw other investors into the pool. 

Series C Funding

Businesses that make it to the Series C stage of venture capital funding are quite successful. For this round, they would be looking for new product development, expansion into new markets, or acquisition of other companies. 

When Harry’s found the desired supplier in Germany, the founders traveled to pitch the idea to the manufacturer. After dealing with them for some time, the razor company was able to raise the funds to acquire the manufacturer. 

It is a great way to scale the company and expand into a new market. 

As the operation gets less risky, more investors are willing to enter. In Series C, you will find hedge funds, investment banks, private equity firms, and secondary market groups. 

At this point, the company has already proved itself, and it has a successful business model. 

In this stage, however, investors come to the table expecting to invest significant amounts of money. 

Conclusion

Understanding the stages of venture capital funding will help you decipher startup news and evaluate prospects. If you are seeking venture capital financing, this will assist you to understand where the stage where your firm currently sits. 

The key take away is that regardless of the stage, investors will require equity stake in the business. Also, the requirement from the investors will vary depending on the stage. 

Launched in 2013, after several rounds of venture capital financing, Harry’s successfully went through every stage of venture capital funding. In May last year, Harry’s agreed to sell for a whopping $1.37 billion to Edgewell Personal Care, the same company that owns Schick.