17th February, 2017
Do you read about startups getting seed funding, landing term sheets, being saved by an angel investor or getting ready for a C Round?
Here’s our guide to getting behind the jargon in the world of startup funding.
So let’s say you’re a hotshot startup with a billion-dollar idea and a plan to disrupt the market and shake some trees.
The only downside is that you literally have no money, so you may need to head to an Angel Investor or Venture Capital (VC) fund for funding.
An Angel Investor is usually an individual who takes a pre-seed or seed investment in a startup so the startup can get its idea off the ground.
In return for a loan, they also receive equity in the startup and can closely monitor its progress. They can be other entrepreneurs, or those in the much-discussed ‘triple F’ category (friends, family and fools).
A VC fund on the other hand takes an early-stage position in a company in return for equity, but are focused on making a return on their investment, and often have several bets in multiple startups at once.
Often, a startup will go through several staged funding ‘rounds’ which will take the company from an idea to an international titan of business (hopefully).
Pre-seed funding involves amounts up to about $1 million, and this cash is usually provided by an angel investor who believes in the idea in return for equity.
The cash goes towards developing the idea, researching the potential market and generally keeping the lights on until the company is ready for further funding.
This round can be up to $2 million, and is aimed at expanding the company beyond a founder by hiring a few new people.
Again, this round is about getting the company ready for further funding rounds by refining the idea, pitch and proposition. Early-stage VC can get involved here.
Now we’re starting to get serious.
This round is typically used for scaling distribution of a product and really getting your business model right, and gets up to the tens of millions of dollars.
This is the traditional VC play space, and what you raise in this round can set a precedent for further rounds as things like valuations get thrown around.
Series B can be up to about $30 million (if you’re lucky) and is really all about turbo-charging scale.
This capital can go towards things like hiring a salesforce, or even to make some acquisitions.
Again, venture capitalists (VCs) are typically the investors here and VCs from previous rounds could be along for the ride on this one.
This is about accelerating the processes started in Series B.
This can be for international expansion and for acquisitions. By this stage you’re something of a proven commodity and some big players can start to play here.
Think investment arms of big banks and bigger VC funds.
Companies can go back at this stage for multiple funding rounds beyond a C Round, and a company may also think about an Initial Public Offering, or listing on the stock exchange.
Here’s some other startup-funding jargon that you may have heard.
The term sheet is simply a document that sets out the rules of an investment.
Think of it like an investment contract which helps avoid confusion. Things like the value of the investment, the percentage stake sought, and anti-dilution provisions are included.
So is the all-important valuation.
A valuation, in its simplest term, is a measure of how much a startup is worth.
There are several methods for determining a valuation of a company, but in the context of a startup it usually comes down to the amount of cash a startup received in a funding round in exchange for equity.
For example, if a startup received $3 million from a VC in exchange for a 20 percent stake in that startup, then the valuation becomes $15 million.
Often, a convertible note is used in the early rounds of funding if a funder is unsure of the value of a company.
For example, an investor can agree to lend a startup $5 million, but in exchange convert the debt owed to it into equity in a later round.
If a startup makes it to a further funding round, the investor automatically gets equity at that stage – for the investor, hopefully the startup is valued higher making its initial $5 million investment a bargain.
This is something to avoid at all costs.
A down round refers to a funding round where the startup is valued at less than a previous round.
For example, if a startup gets Series A funding at a $20 million valuation but then there are problems at the startup where its outlook doesn’t look so bright, investors may only be willing to value the company at $15 million at Series B.