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Guide to Funding Rounds for Startups & Small Businesses

Raising Capital With Funding Rounds Explained
Susan Guillory
Susan GuilloryUpdated April 28, 2023
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Starting a new business takes more than a great idea — it also takes time, effort, dedication, and, of course, funding. Many startups actually go through several stages, or rounds, of funding before they reach the initial public offering (IPO) stage. Each round of startup funding is designed to give the founders the capital they need to advance their businesses to the next level or stage. Some startups might only go through one round of funding, while others might go through four or more.What follows is a closer look at how funding rounds work, what distinguishes one funding round from another, and how much capital you can expect to raise (and from whom) at each stage.

What Are Funding Rounds?

Funding rounds are the number of times a startup founder goes back to the market to raise more capital from an investor or investors. At each round, the founder of the startup typically trades equity (or ownership) in their business for capital they can use to grow or expand their companies. Investors may expect certain milestones or benchmarks to be achieved before the next round.

How Do Funding Rounds Work?

There is no set number of funding rounds you need to have to launch and grow your business. Generally, though, a startup will go through three rounds of funding before completing an IPO.The first investment stage is generally the seed stage (though some startups seek pre-seed funding). The seed stage is followed by additional funding rounds, known as Series A, B, and C. For each funding round, a new valuation of the company is done. The startup’s valuation is determined by various factors, including market size, company potential, current revenues, and management.

6 Rounds of Funding

While the path and funding timeline for every startup is different, below are the six funding stages a startup may go through before reaching an IPO.

1. Pre-Seed Funding

This stage of funding happens very early in the process, when an entrepreneur is still developing a product or service to bring to market. Typically, pre-seed funding comes from the founders, along with their family members and close friends, and doesn’t involve giving away any equity. That’s because it can be hard to attract an investor when all you may have is a great idea and, perhaps, a basic prototype. However, investors will sometimes get in at the pre-seed level if they truly believe in the founder’s idea.

2. Seed Funding or Angel Round

This is the first official round of funding for a startup, and some startups might not even need future rounds if they are able to reach profitability quickly. Seed round funding provides an injection of cash the startup can use to get off the ground. The money may be spent on research and development, market research, and/or hiring a staff. Startups may raise between $10,000 and $2 million in this round.Seed funding is also sometimes referred to as the “angel round” because funding is usually provided by high net worth individuals known as angel investors. These investors typically invest their own money in startups that have high growth potential in exchange for partial ownership in the company. Since the startup doesn’t yet have any track record, investing at the seed level is generally considered high risk.

3. Series A Funding

Once a startup has a clear vision and strategy for bringing in revenues, it may seek a series A round of funding. Generally, Series A investors come from the venture capital world. These more traditional investors typically aren’t just looking for great ideas but also a solid plan for transforming those ideas into a successful and profitable business. To land Series A funding, a startup usually needs to demonstrate they have a minimum viable product (MVP). While moving from seed funding round to Series A funding isn’t easy, an entrepreneur can raise as much as $2 million to $15 million in Series A round funding.

4. Series B Funding

At this point, the startup is past the development stage and likely has a solid customer base. The founders are now looking for funds to help them scale their success and expand their market reach. The company’s valuation is typically higher than it was in the last round. In fact, companies undergoing a Series B funding tend to have valuations between around $30 million and $60 million.Series B funding is usually between $7 million and $10 million, and is often used to expand business development, sales, advertising, tech, support, and employees. In this round, founders may be able to attract a new wave of other venture capital firms that specialize in later-stage investing.

5. Series C Funding

At this stage, a business is successful and may be looking to expand markets, add additional products, or acquire other companies. Series C investors are often seeking to inject capital into the company’s core business in the hopes of getting more than double that amount in return once the company goes public. This level of investment typically attracts a wider array of investors, including private equity, hedge funds, and late-stage venture capital funds. Since the risk is lower at this stage, more investors will typically come to the table.Series C funding is typically focused on scaling the company and growing it as quickly as possible and averages around $50 million, with the company valuation often landing between $100 and $120 million.

6. Pre-Public Round

Many businesses will complete an IPO after their Series C funding ground. However, some companies will proceed to series D, E, and F Series funding to grow further before taking the company public. These funding levels are similar to the Series C round except that they involve increasing amounts of money.Recommended: How Do You Find Venture Capital for a Startup?

Alternatives to Funding Rounds

Bringing on investors and going through multiple rounds of funding may not be the right fit for every business. Here’s a look at some other ways you may be able to raise the capital you need to launch or grow your company.

Small Business Loans

There are many different types of small business loans. While banks typically only offer financing to companies with at least two years of business history and a minimum amount of annual revenue, online lenders typically have more flexible qualification criteria. You may be able to get a small business loan, such as a short-term loan, startup business line of credit, invoice factoring, or equipment financing, from an alternative lender with only a short length of business history. However, you may pay a higher rate and receive a smaller loan amount than a more-established business.Recommended: Personal Business Loans: Everything You Need to Know

Business Grants

There are a variety of government, nonprofit, and private entities that offer grants to startups and young small businesses. You may be able to qualify for a small business grant if your startup supports a specific government initiative, your ownership meets certain qualifications (such as women, veterans, or minorities), or you will be doing business in an underserved community. Unlike loans, grants do not need to be paid back. However, competition for this type of funding tends to be stiff.Recommended: Small Business Loans & Grants for Disabled Veterans

Startup Loans

A startup may have trouble finding a traditional loan if it’s been in operation for less than two years. There are, however, business loans for startups that look at other criteria besides time in business.The U.S. Small Business Administration (SBA), for example, offers a microloan program for small businesses looking to start or expand. Microloans are also available outside of the SBA program through nonprofit and for-profit lenders. Often, these lenders focus on giving opportunities to minority business owners and startups in underserved communities.Recommended: Microloans for Women-Owned Small Businesses

Silent Partner

Another option for financing a business is to bring on a silent partner who provides a capital investment but isn’t involved in the day-to-day operations of the business. If you go this route, however, you’ll want to create a silent partner agreement to ensure that all partners understand their roles in the company.

Business Loan Rates 

No matter where you are on your business journey, there may be a loan available to help you take your venture to the next level. If you’re interested in exploring your startup financing options, Lantern by SoFi can help. With our fast online search tool, you can get a personalized small business funding option in a matter of minutes.Let Lantern help you find the right financing solution for your small business.

Frequently Asked Questions

What are funding rounds in business?
What are the different types of funding rounds?
How long are funding rounds typically?
Photo credit: iStock/akka-photo

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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