A Series of Fortunate Events

Parul Arora - 3B Computer Engineering
Posted on: November 14, 2018

If a company can be thought of like a plant, its growth is fueled by rounds of funding provided at multiple strategic stages. Investors must be cautious in cherry-picking companies to make up their portfolios but also need to weather storms of competition. Of course, in an economically Darwinian fashion, the fittest (and most well funded) companies are likely to survive.

There are different rounds of funding that a company can hope to go through in order to live to infinity and beyond. It is necessary to note that prior to the company even thinking about growing, there must exist a foundation for the company to come into existence. This where the pre-seed round comes into play. It is the earliest stage of funding; at this point the founders develop a prototype they feel is worth presenting. The money for this round can come from their own pockets, their friends, their families, angel investors, or an incubator.

Once a start-up has gained traction, they are ready for their Series A round of funding. This is the first major round of funding and is the stage where stock options are issued to founders, employees, friends, families, and angel investors. At this stage, there is an expectation that the company has a business model and growth plan so it can attract venture capital firms that require some numerical projections to justify potential investments. The value of funding at this round can range from $2 million to $15 million and is usually led by one investor or firm. A significant portion of companies never make it past this round of funding – investors may back out, the model may not be sustainable, or they may simply lose the traction the previously gained.

If the sun shines down on the company, they may raise a Series B round. At this stage, the company needs funding to expand and scale. Roles within the company become formalized  and it is no longer possible for the founders to do all types of tasks. Scaling the company for a larger user base requires hiring talent – accordingly, salaries must be competitive. The volatility of start-up culture often dissuades experienced individuals who depend on financial stability in their professional and personal lives. Hence, it becomes increasingly important to offer a competitive compensation package. Although valuations vary between companies in different industries, companies can expect to receive anywhere from $10 million to $100 million dollars at the end of this round. Funding can come from venture capital firms, particularly those who focus on startups in later stages of growth.

Companies need to show that they have done well with the funding provided to them and that they are valuated realistically. If their valuation decreases as each round progresses, investors may become uneasy despite a growth projections being accurately adjusted. These types of down rounds are tricky to bounce back from.

Series C funding allows the company to expand into newer markets, develop new products, and acquire businesses they feel will strategically aid them in staying competitive. This may be the
last round of funding before the company decides to file for an Initial Public Offering (IPO) or get acquired. There is hard data to prove the belief in the product and in the company which often attracts the attention of banks and private equity firms.

The rest of the alphabet remains for subsequent series of funding. A company may have had a down round, failed public and investor expectation, or simply wanted to stay private for a longer period of time. Ultimately, the companies most firmly rooted in robust foundations weather out even the worst economic droughts.

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