How start-ups move from seed funding to Series C

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Growing start-ups need cash.

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How does a company go from the wow-that’s-a-great-idea phase to the wildly successful business phase?

Money, more money, and perhaps even more money—often coming from professional investors.

In the world of start-ups and emerging businesses, securing funding is often a critical step toward growth and success. Start-ups typically go through several rounds of funding before they can support their viability and growth through their own operations.

It typically starts with the pre-Series A (“seed”) round, and then the series of funding rounds moves through the alphabet until the company has enough funding to operate as a private business, enter the public market, sell itself to someone else, or go out of business. Different rounds have different characteristics and mark different phases in a start-up’s evolution—but all involve risk.

Seed funding, sometimes called pre-Series A funding. The entrepreneur combines savings and personal credit with funding from friends, family, and angel investors, including venture capital partners investing as individuals. This capital helps to cover the costs of market research, prototypes, and other steps that turn an idea into a viable business. Some venture capitalists provide seed funding, but usually with the general partner acting as an individual or angel investor rather than investing on behalf of the firm.

Series A. When the company outgrows its initial funding (i.e., “burns through the cash”), it’s time for the Series A round, which is the new company’s first significant round of financing. Start-ups seeking Series A funding have typically demonstrated market viability and some level of user traction. In addition to funding, Series A investors often bring some expertise to the table to help the start-up scale its operations, expand into new markets, and further develop its product or service. The funding can also be used to hire key personnel and build infrastructure.

Series B. A few businesses are able to generate enough cash from operations after their Series A round to meet their growth expectations. Some businesses fail at this point. Others have enough momentum to grow, but need additional funding to develop new products and conquer their market opportunities. For them, Series B funding is the next step. By this stage, the company should have a proven business model and be generating consistent revenue. Series B investors look for start-ups with strong market positions and the potential for rapid growth. Venture capital firms and institutional investors may be involved in this round.

Series C and beyond. If a company still needs capital, it can move on to Series C and even additional rounds higher in the alphabet. These later rounds follow a similar pattern to raise more capital to support a start-up’s growth. Funding at this stage is often used for strategic acquisitions, international expansion, and maintaining a competitive edge. In addition to venture capital firms and institutional investors, some private equity firms may be interested in later capital rounds.

As the company grows and achieves different milestones, it will (hopefully) become more valuable. With each funding round, a start-up’s valuation typically increases, but as new investors come in, the percentage of ownership—and amount of control—held by the original investors decreases (in a process known as dilution), even if the value of their position increases.

In each round, potential investors conduct extensive due diligence before investing. They assess the start-up’s financials, market potential, team, intellectual property, and competitive landscape. Although venture capitalists accept a high degree of risk in exchange for high potential returns, they are not willing to chase bad deals.

In each round, potential investors may negotiate for their specific investment terms, seats on the board, and other factors they hope will lead to greater success. In addition, investors and founders consider potential exit strategies, such as acquisition or initial public offering (IPO).

Each venture funding round carries risks. And the longer a venture capitalist’s money is tied up, the more risky the investment. Some of the risks include:

However, successful start-ups that secure multiple rounds of funding—and weather the storms —have the potential for substantial returns down the road. That’s why venture capitalists and other early-stage investors are willing to buy a piece of the action before a company is fully formed, and before its business model and path to profitability are clear.