What is the difference between Seed, Series A, B or C invesment stages?
When you are looking for funding. You should be aware of the investor type you are approaching, not all investors are looking to invest in a company in your specific ‘company stage’. In this article we try to explain the difference in Investment stages / Investment rounds.
Seed investment is for angels and very early stage investors. It is typically less than €1 million, and may be as low as €25,000. It’s the first investment to create an actualy existence for a company.
At this stage, a company that will get funding will have a great team (at least one or two people who are backable due to track record, specific expertise or, very rarely, a blinding idea) and a market that is interesting. They will often not have a product, but will have a clear idea of the kind of thing they will build with the money.
At this stage, a formal business plan with three year projections is not very useful, although you will probably have to create one anyway. It can be a helpful exercise in forcing you to codify your thoughts on the future plans for the company, but the one truth about it is that you will deviate from it. A good angel or seed investor will be much more focused on the key metrics that will determine whether your business will succeed or fail. For example, they may not care whether you make €1 million profit in year three or €3 million (because the one thing we all know about a start-up is that it won’t follow its business plan), but they will care, passionately, about how you will ensure that your customer acquisition cost is less than the lifetime value of your customer, or whether you have finances to fund at least two iterations of your product, or some other metric that is at the core of your business.
The purpose of seed funding is to help the company develop a product to fit its market niche. It may go through a couple of radically different iterations as the entrepreneur discovers what customers really want. As the business becomes clearer on what products will work in the market, it might be time for the next round.
The amount raised in a series A is much bigger and has, most of the time, a different purpose than seed capital. a series A investments is usually a follow up to a seed round, in which the company needs more capital to grow to it’s next stage. A series A investments is usually made by multiple investors (co-investors).
Series A is likely to be anywhere from €500,000 to €3 million. Its purpose is to take an existing product, team and market niche and tweak them until they are firing on all cylinders. This may involve hiring new staff, adjusting the pricing structure or business model of the core product or adding new features.
The ideal outcome from Series A would be build to a successful, profitable business that could survive on its own. Many founders may, at this point, choose to continue to grow organically over time. But if they want to move faster – much faster – then they might raise Series B. Also companies that want to raise more than €3 million might go straight to a series B investment round.
Series B funding is rocket fuel for companies. It may be anything from €5 million upwards, and its purpose is to take the company into the stratosphere.
It’s time for Series B when all the stars are in alignment. The core team has executed well so far, the product is successful and the market is clamouring for more. Series B is not about taking risks, or experimentation. It’s about taking something that works and scaling it as fast as possible.
This can often be a tricky time for founders. It’s when entrepreneurialism gives way to execution, which often means that investors want experienced executives at the helm. It’s a time of transition for the company when many of the things that made the company successful in the first place – disruption, innovation, underdog status – may no longer be required.