For rapid valuation climbs, think, “What is the highest risk right now, and how do I eliminate it?”
you may have heard Pre-Seed, Seed, Series A, Series B and more. These labels are usually not particularly useful because they are not clearly defined – we have seen very small Series A rounds and huge seed rounds. The defining feature of each round is not so much how much money changes hands, but how risky the company is.
There are two dynamics at play in your entrepreneurial journey. By digging into them—and how they connect—you’ll be able to gain a clearer understanding of your fundraising journey and how to think about each part of your entrepreneurial path as you develop and evolve.
In general, funding rounds tend to look like this in broad strokes:
- 4 F: Founder, Friends, Family, Fools: This is the first funding that comes into a company and is usually only enough to start proving some core technology or business dynamic.Here, the company is trying to build an MVP. During these rounds, you will often find angel investors of various levels of sophistication.
- Pre-seed: Confusingly, this is often the same as above, only done by institutional investors (i.e. family offices or venture capital firms that focus on early-stage companies). This isn’t usually a “pricing round” — the company doesn’t have a formal valuation, but the money raised is on convertible notes or security notes. At this stage, the company is usually not yet generating revenue.
- seed: It’s usually institutional investors putting a lot of money into a company that’s already starting to prove some of its vibrancy. The startup will have some aspect of its business up and running, and may have some beta customers, beta product, concierge MVP, etc. It won’t have a growth engine (in other words, it doesn’t yet have a repeatable way to attract and retain customers). The company is working on aggressive product development and finding market fit products. Sometimes the round is priced (i.e. investors negotiate a valuation for the company) or it may be unpriced.
- Series A: This is the first “growth” round the company has raised. It typically has a product in the market that provides value to customers and is investing money in customer acquisition in a reliable, predictable way. A company may be about to enter a new market, expand its product range or pursue a new customer base. Series A rounds are almost always “priced in,” providing a formal valuation for the company.
- Series B and beyond: In a Series B round, a company is usually serious about getting into the game. It has customers, revenue, and a stable product or two. Starting with series B, you have series C, D, E, etc. Rounds and companies get bigger. The last few rounds are usually for the company to turn around (make a profit), go public through an IPO, or both.
With each round, a company becomes more valuable, in part because it acquires a more mature product and more revenue as it figures out its growth mechanics and business model. In the process, the company also develops in another way: risk declines.
This last part is critical to how you view your fundraising journey. Your risk doesn’t decrease as your company becomes more valuable. Companies become more valuable as their risk decreases. You can take advantage of this by designing your fundraising round to explicitly de-risk your company’s “scariest” thing.
Let’s take a closer look at where startup risk arises and what you can do as a founder to remove as much risk as possible at every stage of your company’s existence.
Where is your company’s risk?
Risk comes in many forms. When your company is in the ideation stage, you might get together with some co-founders who are a perfect fit for the founder’s market. You’ve identified a problem with the market. Your early prospect interviews all agree that this is a problem worth solving, and that someone is – in theory – willing to spend money to fix it. The first question is: is it possible to solve this problem?