The expression "financing round" (followed by the letters A, B, C, etc.) refers to a specific way of raising capital that is carried out during the growth phase of a start-up. The need to receive income to finance one's project accompanies every company from its inception to full development.
How the financing of a start-up works
Before exploring how a funding cycle works, it is necessary to identify the different actors involved. Firstly, there are the entrepreneurs who hope to obtain funding for their company. As the company grows, it tends to progress through funding rounds. Usually, a company starts with a seed round and then continues with funding rounds A, B and then C.
On the other side are the potential investors. While investors want companies to succeed because they support entrepreneurship and believe in the goals of the project, they also hope to see a return on their investment. By acquiring shares in the capital, if the company grows and makes a profit, the investor will be rewarded in proportion to the investment made.
Before any financing phase begins, analysts carry out a valuation of the company, which is called a 'pre-money' valuation (you can read more about this here). Valuations are derived from many different factors, including management, proven track record, market size and risk. In turn, these factors have an impact on the types of investors that might be involved and the reasons why the company might be looking for new capital.
The early stages of financing a start-up usually correspond to pre-seed and seed. These terms refer to those capital injections that allow the founders of a company to start operations. Often this phase arrives so early that it is not considered within the various funding phases. In the pre-seed phase, the funders may be the founders of the business project themselves.
The first official phase of the funding path is therefore seed. It is so called because it can be compared to a seed that finances and helps a company and its products grow. At this stage, there are many different funders including founders, family members, incubators, venture capitalists and many others. The most common, however, are angel investors, who tend to invest in riskier companies and ask for an equity stake in return.
Series A round
When a company achieves solid results in terms of customers, turnover and performance indicators, it can choose to access Series A funding. This allows them to optimise growth and exploit the possibilities of scaling up in other markets. It is crucial at this stage to devise a business model that aims to achieve long-term profitability.
Companies in the seed stage often have great ideas, but are not always able to monetise them. In the Series A stage, on the other hand, investors look not only for ideas, but also for companies with strategies that have the potential to grow and achieve large revenues. Normally, the investors interested in this stage are more traditional venture capital firms, but equity crowdfunding is growing strongly in this part of the market.
Series B rounds
Subsequent funding rounds aim to take companies beyond the development stage and expand their market reach. Companies that have proven they can achieve market success on a larger scale enter the Series B financing rounds.
This phase is characterised by very thorough evaluations of the companies, but often by the same players as we have seen in Series A. The only difference is the presence of venture capitalists specialising in this specific stage of growth.
Series C round
Companies that have been successful and are looking for further funding to develop new products, enter other markets or acquire shares in other companies enter this stage.
Investors in Series C funding rounds aim to double the amount invested, trying to facilitate the scalability of the company (e.g. by using the investment funds to have the company acquire another company) and its rapid growth.
In phase C, the previous investors are joined by hedge funds, private equity firms, investment banks and others. Security is provided by the results achieved and the effectiveness of the company's business model.
Usually, this is the last investment phase. Some companies, however, may also move into the D and E series.
More and more companies are using equity crowdfunding instead of the traditional A-B-C rounds, sometimes combined with traditional venture capital or business angel funding. In this case, the rounds are called in the Crowd A, B and C rounds. The main advantage of relying on serial equity crowdfunding is being able to participate in the different stages of growth of a company thus maximising the capital invested in the first rounds.