Three people look down at an open laptop. On the left is a woman with one hand to her cheek. In the middle is a man in glasses; his mouth is slightly open as if he's speaking. On the right is an out-of-focus man wearing a light blue button-up shirt.
A company with an IPO is in the final stage of funding. At this point, the company is considered public and is subject to more scrutiny in exchange for a wider source of funds. — Getty Images/skynesher

The process of seeking investors for the first time can be confusing, especially when it comes to understanding the different types of investment rounds. These rounds of funding are often sequential and generally increase as the company grows and seeks bigger opportunities.

Here’s a brief overview of the typical funding rounds a startup may go through and what to consider when pitching investors at each stage.

Pre-seed funding

A new company needs money to jump-start its initial operation. The first money a company uses is known as pre-seed funding. These funds are typically from individuals who truly believe in the company’s business model or product, such as the company’s founders.

Another source of pre-seed funding may come from friends and family. One of the defining characteristics of pre-seed funding is a lack of compensation. Therefore, ownership percentages are typically not exchanged at this stage. The fundamental purpose of pre-seed funding is to prove the idea has the ability to work.

[Read more: A Practical Guide to Funding Your Small Business With Business Loans and Beyond]

Seed funding

This is the first official round of funding a new company will undertake. A company seeking seed funding has typically already explored the business model and needs additional funds to make the idea a reality. At this stage, the company may have an inherent value associated with it. In 2020, the average valuation for a company in the seed funding stage was $8.5 million.

The source of seed funding is wider than pre-seed funding as company equity is exchanged for capital. Since the funding is eventually rewarded, the funds raised during this round are typically larger in scope. The average seed funding round in 2020 was $1.9 million.

Series A funding

The Series A funding round is typically from more traditional funding sources spearheaded by industry titans such as Sequoia Capital or Google Ventures. One of these well-known venture capital firms will serve as an “anchor” in the funding process — attracting additional investors over time.

The average valuation of a company in Series A funding in 2020 was $22.2 million — a significant increase from the average valuation during seed funding. This increase is due to the company’s proven track record during this funding round.

The fundamental purpose of pre-seed funding is to prove the idea has the ability to work.

Series B funding

After a company’s expansion has proven viable, it is time to move on to Series B funding. This form of funding is used to expand a company’s market reach. The funding will increase advertising efforts, bolster tech support, develop sales models, and hire employees. The sources of this funding round are similar to Series A funding, but a company may attract new sources that specialize in later-stage investing. Expanding a company costs serious capital. This is reflected in the average funding amount for Series B funding at $33 million in 2020.

Series C funding

A company entering Series C funding is typically looking to diversify an already successful business. The funds are mainly used to develop new products, expand into additional markets, or even acquire other businesses. Since the company is now a successful venture, more established and risk-averse capital sources — like hedge funds, private equity firms, and investment banks — can provide support.

The valuation during Series C is based on hard data as the company has a proven track record of expansion and has shown its goals are attainable. The allure of possible future success is no longer a significant factor. This is often the last funding round, but it is not uncommon for a company to enter into a Series D or even a Series E round.

[Read more: Financing Strategies for Every Stage of Your Business]

Initial public offering (IPO)

IPO is the final funding stage. It allows the general public to buy shares in the company. This stage involves a new level of public transparency. The general public is entitled to company documentation including the company’s prospectus and privately held filing information. The company is no longer private after an IPO, and the transparency level will reflect this.

An IPO unlocks a significant level of funding while offering a lower equity cost. The only downside, besides the legal costs, is a significant loss of company control. A company with an IPO is no longer a startup and typically operates on a global scale.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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