VC Funding: What You Need To Know About Business Stages & Rounds
The stage of your business is important to VCs because they specialize in investing in specific stages of companies. Here is a quick guide to understand how stages are defined and the rounds associated with each.
In the early days, you are in the idea stage and may have some traction. You have an assumption about the market but you have not proven it yet (i.e., you do not have a ton of customers). The only people that are aware of you at this time are your mom and dad, best friend and some early adopters.
Angel Round - In the angel stage, you probably don't have much more than an idea. You may have a light weight prototype of your product, but you do not have customers. Here you have a business plan, PowerPoint and maybe even a website. You should have already completed some market research that supports your assumptions to continue with the business idea.
Seed Round - Now your are starting to get somewhere with your business. By now you have a working prototype or beta product or service (rudimentary as compared with your grand vision) and some beta clients. Beta means that you have an early product that doesn’t have all of the kinks out and still needs a lot of bells and whistles. Don’t be like Gmail and have your beta last 5 years.
Series A Round- By this time you should have some paying customers. You may still be finding product market fit to some extent, but the important thing is that someone is willing to pay for your product or service. Your expenses are still high and it probably costs you more to get a customer than what the customer is paying you.
You have product market fit down. You know exactly who is buying from you and the quickest way to reach them. Sales has become a machine. Now you are focused on getting as many customers as fast as possible.
Things are starting to break in your organization because you are growing so fast. What worked with 50 customers does not work with 150 (or a lot more customers if you are B2C). And what worked with 20 employees doesn’t work with 60. For example, turning around to tell your developer about a bug in your software is no longer an effective form of communication.
Scale is the hot word here. You are now scaling your business to be able to support a large amount of customers.
Series B Round - A ton of growth is happening here and you now have a reasonable amount of history to start understanding your business in terms of customer acquisition costs, average deal size, expenses, etc. You are now making projections based on actual information and no longer rely on assumptions.
This is it: your grand finale.
Here the company is still growing fast but with the law of large numbers, you are not growing as fast. You have systems and processes in place to continue to grow and support your large customer base.
Don’t forget, this is borrowed money and you need to start thinking about returning it to investors. During later stage investments you should start to put the pieces in place for an exit.
Series C Round - Your revenue growth is strong and your expenses as a proportion are decreasing. You have all of the pieces in place, but need a push to get to the next milestone.
Later Rounds - There can be many rounds in later stages. By this stage, however, your company should be gearing up for an IPO or acquisition. You may be seeking investment to cover expenses for an IPO (~$1 million+).
A lot of companies do not make it all the way through each of these stages and get every round of funding. Some companies bootstrap in the beginning and take investment at a later stage. Others get acquired fairly quickly after an early round of funding. This is known as an acquihire, where the acquirer basically buys the company for its employees and not its business. It all really depends on your business' unique situation.
This is just a basic overview of what I have seen in my experience. I hope it helps you to better understand and navigate this whole VC thing.
PS - Don’t get bogged down by the name of the rounds. The round names are marketing to your customers and future investors as a way to show your stage. Your lawyers may even call the rounds by different names than you tell the press. The stage of the company is really the most important part for the VC.