You’ve probably seen headlines like “Startup raises $25 Million in Series B round.”
But if you’re not deep into the world of venture capital, you might be wondering what exactly that means.
Funding rounds are when startups raise money by selling equity (ownership) stakes to investors. Each “round” corresponds to a stage in a company’s lifecycle, and can represent anywhere from a few thousand to tens or hundreds of millions of dollars invested.
In this article, we’ll explain the different venture capital funding rounds, and briefly discuss how startups are valued.
Let’s dive in.
Funding Rounds Explained
Funding rounds follow a predictable path, though no two startup journeys are exactly the same.
Here’s a funding round breakdown organized from smallest to largest.
| Stage | Size |
| Pre-seed | Up to $200k |
| Seed | $1 – $5M |
| Series A | $5 – $20M |
| Series B, C, D, E… | $10 – $500M+ |
| Initial Public Offering (IPO) | $10 – $4,000M+ |
Pre-Seed
The first round of funding is called a “pre-seed.” It’s pretty informal, and money typically comes from the founders themselves, friends, family, and sometimes “angel investors” who meet minimum standards of income and/or net worth set by the Securities and Exchange Commission (SEC).
Startups use this money to validate their ideas, build minimum viable products (MVPs), and do market research. They’re probably not profitable (and sometimes have no revenue at all). Their goal is to transform an idea into something tangible enough to attract larger investors.
Seed Funding
Seed rounds are the first “official” equity rounds. Investment comes from angels, early-stage venture capital funds like Y Combinator, or crowdfunding platforms like AngelList.
Total funding could reach into the millions, but usually comes from a large number of small investments. For instance Fresh Paint, a SaaS startup, raised its first $1.65M from 39 different investors.
Companies that raise seed rounds are still working on finding their ideal customer base, have 2-10 employees, and enough traction (revenue or user growth) to pique a venture capitalist’s interest. These are risky bets, but VCs expect significant returns should the startup succeed.
Series A Funding
This is when things get serious. By the time a company is ready for a Series A, they’re close to (or already found) product-market fit, and have considerable traction.
Professional venture capital firms are investing millions of dollars, so they expect financial discipline, GAAP-compliant reporting, and clear tracking for metrics like customer acquisition cost (CAC), lifetime value (LTV), or churn.
Money from these rounds is used for hiring, scaling operations, and growing market share.
VC expectations can differ, but revenue growth is usually more important than profitability. In fact, that’s one of the things that makes venture capital unique. Most professional funds expect most of their investments to fail. However, they’re betting that two or three out of 100 bets are so successful that they pay for their entire portfolio.
Series B and Beyond
Successive rounds are labeled alphabetically from this point forward (although some startups raise multiples of the same round, depending on circumstances). There’s no strict rule.
These startups have product market fit, know who their best customers are, and are focused on capturing as many of them as possible.
The goal is the same as for Series A: growth. But the scale is considerably larger. For example, OpenAI (the creators of ChatGPT) raised a $4B Series F back in March. They’re still not profitable, but investors expect they will be eventually.
IPO: The Exit Strategy
This is the last stop for a venture capital startup.
An initial public offering (IPO) is known as a “liquidity event” and allows investors (and founders) from all previous rounds to cash out on the success of a growing company by selling to the public at large.
There are intense regulatory requirements and scrutiny applied to public companies, but for startups that make it this far, the rewards are lucrative.
| Related: How exactly do you sell equity in your startup? Legally? One method is with a Simple Agreement for Future Equity (SAFE) note. Read our Safe Note Explained article to learn more. |
How Much Is a Startup Worth?
Before investors can buy ownership stakes, everyone has to agree on a value. For publicly traded companies, it’s easy – just look for the going rate on the stock exchange. But for startups, it’s much more difficult.
After all, how much is an unprofitable company really worth?
They’re not necessarily looking at what a company is worth right now. Rather, they’re asking how much it could be worth in the future. Investors each have their own techniques, but usually look at a combination of the same factors:
- Market Size: What’s the total value of all the business being done by all the companies in this sector?
- Market Share: What proportion of the total market does the startup currently serve? How many users does your service have?
- Revenue: Before considering costs, how many total dollars is a startup currently generating?
- Growth: How quickly is a company capturing market share and adding revenue?
The tough part for founders and investors is how subjective valuations can be. They’re based on forecasts – not certainties. A founder might assume 15% monthly growth, while an investor believes 7% is more realistic. And suddenly? The company’s future “value” shifts by millions of dollars.
That’s one reason startups hire a chief financial officer to help with fundraising. Their guidance can help you build credible, defensible financial models and package your story in a way that balances optimism with realism.
Plus, investors take comfort knowing you have a CFO helping you practice financial discipline – it means you have the maturity to handle capital responsibly.
Wrap Up
If you’re a small business owner reading about funding rounds, chances are, you’re juggling a lot: growing sales, monitoring cash flow, and trying to make sense of your numbers.
But before you worry about seed vs Series A funding and beyond, the most valuable move you can make is getting your books rock-solid. That’s where we come in.
In addition to accounting and CFO advisory services, we provide done-for-you bookkeeping that ensures financials are clean, accurate, and ready for tax season. Think catch-up/cleanup work, and consistent month-end closes that always let you know where you stand.
If your books are messy, tax season was stressful last year, or you’re unsure what last month’s profit actually was – let’s fix that. Reach out for a free consultation today.
We’ll handle the numbers so you can focus on growth.
