Capital

Venture Capital 101: What Are Investment Rounds?

Understanding every investment round.
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If you’re new to the startup scene and want to learn more about seed funding, you’ve come to the right place. By now, you’ve probably seen headlines describing “seed funding” rounds of up and coming Filipino startups. But not all rounds are built the same. Here’s everything you need to know about how seed funding works.

The term “seed funding” itself is sometimes used to describe startup funding as a whole, but it technically only refers to a particular investment round, or “level,” if you will. These investment rounds are initiated to supply startups with necessary capital in order to move the company forward. Often, investments are given in exchange for equity, or a slice of the company, if investors see the startup becoming profitable in the future. However, funding isn’t a one-time, big-time deal. It takes place over a series of rounds and stages so investors can see how startups efficiently spend capital.

Funding typically increases per round, with the main players early in the game being angel investors and venture capitals. Toward Series B and Series C funding, the main players are big private equity firms and investments banks. Each round takes startups closer and closer to the real endgame: an IPO.

Here’s an easy breakdown of each round:

1| Pre-Seed Funding

This is the earliest funding stage designed for unknown startups still getting their feet wet in the startup scene. At this early stage, the startup is still figuring out its operations. Angel investors are usually the only ones that participate in this stage, as well as any connections startup founders may have among friends and family. Funding is often small, but enough to get the startup to stand on its own feet.

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Investment size at this stage, according to QBO Innovation Hub: $10,000 to $20,000 

Valuation of startup at this stage: $100,000 to $200,000

2| Seed Funding

This is the stage that gets investors’ attention. It marks the first official equity funding stage now that you’ve efficiently spent your pre-seed funding. The seed funding stage is where the high rollers come in: angel investors, accelerators, incubators, venture capitals, corporate venture capitals, and more. A startup is not expected to be making profit by this stage, so what you’re selling isn’t your income but your big idea—and a brilliant pitch. Funding at this stage can range from hundreds of thousands of Filipino pesos to millions of dollars, which is often spent on research and product development, assessment of product-market fit, and key hiring, according to the Filipino venture capital firm Foxmont Capital.

Investment size: $100,000 to $550,000

Valuation: $500,000 to $2 million

3| Series A Funding

It’s important to note that not all startup make it past the seed funding stage. Only once you’ve proven your startup’s reputation for steady revenues, growing customer base, and a decent burn rate can you reach this stage. At the Series A Funding stage, investors will pour in more capital into the companies that have a solid business model, long term profitability, and strong management team. Funds raised in Series A rounds are used to optimize the business model to make it more scalable and innovative, according to Foxmont.

Investment size: $550,000 to $3 million 

Valuation: $1 million to $8 million

4| Series B Funding

If seed funding is about getting your feet on the ground and Series A is about scaling your business, Series B Funding is about broadening your market reach and geographically expanding. By this stage, your startup should be solid and secure in its profitability and market position. Funding is typically used to broaden market reach through expansion and advertising. Participants in Series B funding are usually venture capitals, private equity firms, hedge funds, and corporate venture arms, as these typically offer larger capital.

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Investment size: $3 million to $15 million

Valuation: $8 million to $30 million

5| Series C Funding and Beyond

If you reach Series C funding and beyond, then your startup is either a unicorn or a market leader. Only the most successful reach this point thanks to steady and sustainable business models, growing revenues, and a strong customer base.

“Capital acquired from additional funding rounds are commonly used for market share supersizing,” according to Foxmont. This means new product development and even strategic acquisitions. Investors that participate in this round are usually private equity firms, investments banks, and hedge funds, with millions of dollars of capital available to spend. This is sometimes the last round before a startup makes the big jump to launching an IPO and joining the likes of startups-turned-corporations on PSE—or even NASDAQ.

Investment size: $15 million or more

Valuation: $30 million or more

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Anri Ichimura
Section Editor, Esquire Philippines
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