Series Funding: A, B, and C

What Is Series A, B, and C Funding?

Series A, B, and C are funding rounds that generally follow "seed funding" and "angel investing," providing outside investors the opportunity to invest cash in a growing company in exchange for equity or partial ownership. Series A, B, and C funding rounds are each separate fund-raising occurrences. The terms come from the series of stock being issued by the capital-seeking company.

How Series A, B, and C Funding Rounds Work

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 a new business. Businesses tend to advance through funding rounds; it's common for a company to begin with a seed round and continue with A, B, and C funding rounds.

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 they are funding. If the company grows and earns a profit, the investor will be rewarded commensurate with the investment made.

What Is the Funding Valuation?

Before any round of funding begins, analysts undertake a valuation of the company in question. Valuations are derived from many factors, including management, growth expectation, projections, capital structure, market size, and risk.

Investors each have their own method for valuating a business, but many use some of the same factors:

• Market size: The size of the market the business is in, in dollar value
• Market share: How much of the market the business makes up, like 0.10% of the overall market
• Revenue: An estimate of how much the company made and will make. This is market size multiplied by market share.
• Multiple: Generally an estimate used by the investor to give them an idea of the business's value, like 10x or 12x the revenue
• Return: The increase in value, in percent form of how much is invested, based on estimates of growth in market share, market size, and revenue.

Pre-Seed Funding

The earliest stage of funding a new company comes so early in the process that it is not generally included in the funding rounds. Known as "pre-seed" funding, this stage typically refers to when a company's founders get their operations off the ground. The most common "pre-seed" funders are the founders, close friends, supporters, and family.

Depending upon the nature of the company and the initial costs of developing the business idea, this funding stage can happen very quickly or take a long time. It's also likely that investors at this stage are not investing in exchange for equity in the company.

Seed Funding

Seed funding is the first official equity funding stage. It typically represents the first official money a business venture or enterprise raises. Some companies never extend beyond seed funding into Series A rounds or beyond.

Seed funding helps a company finance its first steps, including market research and product development. With seed funding, a company has assistance in determining what its final products will be and who its target demographic is. Seed funding is generally used to employ a founding team to complete these tasks.

What Is Series A Funding?

The first round after the seed stage is Series A funding. The term gets its name from the preferred stock sold to investors at this stage. In this round, it's important to have a plan for developing a business model that will generate long-term profit.

Typically, Series A rounds raise between $2 million and $15 million, but this number varies due to many circumstances. From Jan. 1, 2023, to May 29, 2023, the Series A funding average was $22 million.

In Series A funding, investors are not just looking for great ideas. Rather, they are looking for companies with great ideas and 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 (pre-money) at up to $50 million.

The investors involved in the Series A round come from more traditional venture capital firms. Well-known venture capital firms that participate in Series A funding include Sequoia Capital, IDG Capital, Google Ventures, and Intel Capital.

How Series A Funding Works

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 it easier to attract additional investors as well. Angel investors also invest at this stage but tend to have much less influence in this funding round than in the seed funding stage.

It is increasingly common for companies to use equity crowdfunding to generate capital as part of a Series A funding round. Part of the reason for this is the reality that many companies, even those that have successfully generated seed funding, tend to fail to develop interest among investors as part of a Series A funding effort. Indeed, fewer than 10% of seed-funded companies will go on to raise Series A funds as well.

What Is Series B Funding?

Series B rounds are about taking businesses to the next level, past the development stage. Investors help startups get there by expanding market reach. Companies that have gone through seed and Series A funding rounds have already developed substantial user bases and have proven to investors that they are prepared for success on a larger scale. Series B funding is used to grow the company so that it can meet these levels of demand.

How Series B Funding Works

Companies undergoing a Series B funding round are well-established, and their valuations tend to reflect that; Series B companies had a median valuation of $35 million in 2022 and an average of $51 million.

Series B appears similar to Series A regarding the processes and key players. Series B is often led by many of the same characters as the earlier round, including a key anchor investor that helps to draw in other investors. The difference with Series B is the addition of a new wave of other venture capital firms specializing in later-stage investing.

What Is Series C Funding?

Businesses that raise Series C funding are already quite successful. These companies look for additional funding to help them develop new products, expand into new markets, or even acquire other companies. In Series C rounds, investors inject capital into successful businesses in an effort to receive more than double that amount back. Series C funding focuses on scaling the company, growing as quickly and successfully as possible.

One possible way to scale a company could be to acquire another company. Imagine a startup focused on creating vegetarian alternatives to meat products. If this company reaches a Series C funding round, it has likely already shown unprecedented success in selling its products in the United States. The business has probably already reached targets coast to coast. Through confidence in market research and business planning, investors reasonably believe the company would do well in Europe.

Perhaps this vegetarian startup has a competitor with a large market share. The competitor also has a competitive advantage from which the startup could benefit. The culture appears to fit well, as investors and founders both believe the merger would be a synergistic partnership. In this case, Series C funding could be used to buy another company. As the operation gets less risky, more investors come to play.

How Series C Funding Works

In Series C, groups such as hedge funds, investment banks, private equity firms, and large secondary market groups accompany the type of investors mentioned above. The reason for this is that the company has already proven itself to have a successful business model; these new investors come to the table expecting to invest significant sums of money into companies that are already thriving as a means of helping to secure their own position as business leaders.

Most commonly, a company will end its external equity funding with Series C. For the most part, companies gaining up to hundreds of millions of dollars in funding through Series C rounds are prepared to continue developing globally.

Many of these companies utilize Series C funding to help boost valuations in anticipation of an IPO. At this point, companies enjoy higher valuations. Companies engaging in Series C funding should have established strong customer bases, revenue streams, and histories of growth.

The Bottom Line 

Understanding the distinction between these rounds of raising capital will help you decipher startup news and evaluate entrepreneurial prospects. The different funding rounds operate in essentially the same basic manner; investors offer cash in return for an equity 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 and Series A, B, and C investors all help ideas 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.