For any organization looking for a new business model (startup), financing is the foundation of development. It is easy to find an investor, but it is not so easy to work with them properly so that they are interested and want to invest in your project, due to the complexity of the startup development process. The division into rounds of investment is a good way to do this.
There are the following investment rounds:
- Pre-seed;
- Seed-round;
- A, B, C, D;
- IPO.
What is the purpose of dividing into rounds?
The division into rounds is necessary in order to know at what stage of financing a startup is, which will help to choose the right investment strategy. It will also help the investor minimize his risks and conduct interim results of the startup’s development. Each round has certain tasks and funding limits.
Let’s analyze the rounds of investment and their features
A round is usually called a stage of financing a project by investors. When dividing into stages, the stage of the company’s development is taken into account.
Venture capital (venture – risky, adventurous) – capital of investors intended for financing new, growing or struggling for a place in the market of enterprises and firms (startups) and therefore associated with a high or relatively high degree of risk. In contrast to classical investments (assuming return of funds), the model of venture capital financing includes a high probability of loss of investments in each specific company, while profitability is achieved due to high returns on the most successful investments.
Venture investments have a high degree of risk, as only 10% of start-ups are realized and bring big profits.
The peculiarity of venture capital investment is to find startups that may have a huge potential. And by investing a certain amount of money in the project when the startup takes off, you can get many times more. But this business is unpredictable and very risky.
Business angels and their role
Business angels are private investors who invest in startups at the earliest stages. The purpose of the investment is to make a tangible profit.
The main distinguishing features of business angels:
- use their own funds for investments;
- they give preference to projects in the innovative sphere;
- invest with the expectation of maximizing profit from the value of their share, in case of success of the company;
- assist the company throughout its development, actively participating in the process and sharing their experience;
- take the company to the minimum viable version of the product.
Pre-seed (pre-seed round)
The stage when the creators have only a project and an idea. Consequently, it is almost impossible to attract investors at this stage, then FFF (family, friends, fools) funds come into play. That is, investors can be family, friends or those who are interested in the idea. At this stage, most projects are dropped out before they are realized. Those who have enough motivation and money manage to create a prototype of the product and start forming a team. Then the project enters the venture ecosystem and begins to interact with incubators or gas pedals. The creators usually have an experienced mentor, who later becomes an advisor to the project.
Seed (seed round)
This stage is one of the most difficult, long and decisive. Money is needed to finalize a prototype or bring it to market requirements. Creators are engaged in testing the business model, in case it is successful, the project begins to gain momentum thereby attracting the interest of investors. At this stage, many projects without successful results will fall into oblivion. Since the stage is quite long and full of uncertainty, for many there comes a period called “valley of death”.
The main problems of the stage can be:
- unsuccessfully chosen business model of the project;
- high competition in the market;
- improper prioritization of the project;
- lack of adequate funding.
The outcome of this round should be the final release of the program.
Round A (Funding from $500,000)
Round when the startup turns into a company that already has a working business model, its customers, team and experience in the market. The company is already earning money on its own, and at this round investors are willing to invest in projects, as the independence and efficiency of the project has already been tested in the market.
Only a few projects ready for this round enter the market every year, and investors follow them closely. Round A is where the early stages of project funding come to an end.
The main objectives of the round:
- to establish a foothold in the market with a permanent serial production;
- to organize a full and qualified team.
Round B (Funding from $ 1 million)
Round, where the company is scaling up, it already has its own earnings, business angels, or a fund in the company’s capital. The size of the conversion is determined, among other things, by the peculiarities of the market – companies reach the limit of development.
The main objectives of the round are:
- increasing profits;
- development of new markets of activity;
- expansion of coverage in the selected area.
Rounds C, D and IPO
Round C (The volume of financing can reach $ 100 million).
In this round, the main task is to achieve self-sufficiency of the company. It is only at this stage that the startup becomes profitable and the company can exist on its own.
Round D (The amount of funding can reach $ 100 million)
A round in which the company can be sold to a strategic investor or go public.
In these two rounds, the company is actually preparing for an IPO. It is firmly established in the vastness of the market, knows its work and potential perfectly. Also, investors are clear on the picture and are ready to give a market valuation of the company. A public offering is one way to get out of an investment.
Only a small fraction of startups are able to go through all the rounds. This division into investment rounds gives an idea of the scenarios and dynamics of startups, as each stage is characterized by a different valuation range and investment type. The division into rounds also helps minimize risks and streamline the investment process.
