Learn more about the different funding stages, the common investors and what they are looking out for
Written by Ericz Ezekiel Tay
Starting a business can be challenging as not every startup has immediate access to funding or the ability to generate revenue. Often, the founders will have to secure external capital in addition to building a product, hiring a team and scaling revenue.
In this article, we aim to provide an overview of the different funding stages for startups, explaining who the common investors are, what they are looking out for and the type of contracts that are used.
PRE-SEED FUNDING
Pre-seed funding is the initial form of investment for startups and is sometimes referred to as "family and friends" funding. It is usually based only on an initial concept and the main objective is to develop a prototype or minimum viable product, and to cover initial expenses, e.g. incorporation, market research, concept development etc. Pre-seed funding can range anywhere between $10,000 to $1 million.
Common Investors. Common investors include startup accelerators, angel investors, family and friends, and are drawn to the innovative ideas with high growth potential despite the risk involved. It is not a must for startups to need pre-seed funding as founders often tap on their personal savings at this stage. In most cases, angel investors already know the founders well if they decide to invest at pre-seed stage.
Preparation. Startups should present a clear business plan, pitch deck and proof of concept.
Contracts that are used. This usually involves convertible securities, starting as a loan and converting to equity upon meeting certain conditions.
SEED FUNDING
Seed funding is the first significant round of investment for startups that have demonstrated a market need for their product. The main goal of seed funding is to provide the necessary capital to expand ideas, increase the company's value and prepare for future funding rounds. Seed funding helps startups move into an initial phase of fast growth. Seed funding can range anywhere between $10,000 to $5 million.
Common Investors. Common investors include angel investors, venture capitalists, incubators, accelerators and large institutions that specialise in growing new businesses. Investors expect a share in the future of the startup rather than providing loans and are interested in startups that have laid the foundations.
Preparation. Startups should present a proof of concept, minimum viable product, competent team, effective marketing strategy to achieve growth and sufficient traction to attract mainstream investors.
Contracts that are used. Seed funding may be offered in return for equity, as a loan, or in the form of convertible debt such as convertible loan notes or simple agreements for future equity.
SERIES A FUNDING
Series A funding is a pivotal stage in a startup's journey, following pre-seed and seed funding rounds. At this stage, the startup has demonstrated its potential to generate predictable revenue and achieve market penetration. The primary goal of Series A funding is to streamline operations, expand the sales team and make strategic hires focused on business growth. This round of funding helps scale the startup to the next level. Series A funding can range anywhere between $2 million to $20 million.
Common Investors. Investors in Series A funding typically include venture capital firms, individual investors, and banking partners. They look beyond ideas to assess performance and are interested in startups that have a developed customer base, demonstrated market reach and a solid revenue stream.
Preparation. Startups seeking Series A funding should have:
- A base of customers and demonstrated increasing reach and revenue
- A business model/plan for long-term growth and profitability
- Proven product-market fit and readiness to scale
- Transparency and communication with investors for thorough due diligence
Contracts that are used. Startups often offer shares rather than convertible notes. The negotiation involves a term sheet that sets the stage for formal legal agreements, outlining the investor's expected return and control over business decisions.
SERIES B FUNDING
Once a startup has been launched and established, it may need to acquire Series B funding. This stage follows the successful operations and proven business model from earlier funding rounds. Series B funding is generally less risky than Series A funding, attracting more interested investors. The main goal of Series B funding is to stabilize the business, improve operations, and achieve significant growth. This funding supports infrastructure development, marketing, and expanding the team to meet increasing demand. Series B funding can range anywhere between $5 million to $50 million.
Common Investors. Investors include private equity firms, larger venture capital firms and institutional investors, and they look for established companies focused on market growth and geographical expansion. They are interested in companies that have demonstrated increasing reach and revenue and have plans to invest in infrastructure and personnel.
Preparation. Startups seeking Series B funding should demonstrate:
- A proven business model and operational stability
- A base of customers and increasing market reach
- Plans for long-term growth and profitability
- Preparedness for thorough due diligence, including a clear valuation
Contracts that are used. Series B funding typically involves equity agreements, where startups sell shares to investors at an agreed valuation. The negotiation often includes a term sheet outlining the investor's expected return and level of control.
SERIES C FUNDING
Series C funding is meant for companies that have already proven their business model but need more capital for expansion. At this stage, the company is well-established and growing, seeking to make strategic investments in market expansion, new products, or acquisitions. The primary goal of Series C funding is to support significant business growth, including entering new markets, launching new products, and acquiring other companies. This funding helps to further solidify the company's market presence and expand its reach. Series C funding can range anywhere between $30 million to $100 million.
Common Investors. Investors include large banking institutions, hedge funds, and private equity firms, and they are interested in companies with a strong track record of growth, established national presence, and readiness for international expansion. They seek startups with lower risk profiles that demonstrate substantial market potential and strategic growth opportunities.
Preparation. Startups seeking Series C funding should demonstrate:
- A proven business model and operational stability
- Established national presence and expansion into new territories
- Plans to launch new products, enter new markets, or acquire rival businesses
- Preparedness for thorough due diligence, including a solid valuation
Contracts that are used. Similar to Series B funding, Series C funding typically involves equity agreements, where startups sell shares to investors at an agreed valuation. The negotiation often includes a term sheet outlining the investor's expected return and level of control over the company.
SERIES D FUNDING
Typically, Series C is the final funding round for startups. After this stage, companies often find themselves in one of the following scenarios:
- The business generates sufficient revenue to sustain its growth independently
- The company has undergone or is planning an exit
- The startup did not meet its Series C goals and requires additional capital
Due to these factors, fewer than 5% of startups proceed to Series D funding and even fewer advance to later stages such as Series E, F, or G.
If Series D funding is needed, it typically occurs after the company has reached a mature stage and is looking to achieve specific goals like further expansion into new markets, launching new products or preparing for an IPO. The main goal of Series D funding is to support substantial growth initiatives, including market expansion, product launches, or acquisitions. It provides the capital needed to achieve significant business milestones.
Common Investors. Series D funding is typically led by institutional investors, including private equity firms, hedge funds and banks. These investors offer not only capital but also expertise to prepare the company for an IPO, merger or acquisition. Investors at this stage are interested in companies that are already market leaders, generating significant revenue and ready for major growth steps. They seek businesses with clear plans for expansion, product development, or strategic acquisitions.
Preparation. Startups should demonstrate:
- Dominant market leadership and substantial revenue generation
- Clear goals for the use of funds, such as entering new markets or acquiring other companies
- Preparedness for an exit strategy, whether through an IPO or acquisition
Contracts that are used. Similar to Series B and C fundings, this typically involves equity agreements where startups sell shares to investors at an agreed valuation. The negotiation often includes a term sheet outlining the investor's expected return and level of control over the company.
LEGAL ASSISTANCE
Securing funding is essential for launching and growing a startup. Each funding stage – pre-seed, seed and Series A to D – comes with unique opportunities, challenges, and legal considerations. Understanding these stages helps you manage investor relationships effectively.
No matter what stage you are at with your funding rounds and business growth, our Corporate team regularly advises founders, startups and new businesses at all stages of their lifecycle, including investment agreements and commercial contracts. Get in touch with us to learn more.
Get in touch with Ericz to learn more. We are here to partner with you, offering an unbiased perspective and exploring practical alternatives.
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