Simplifying Startup Finance: The Maze of Startup Funding Rounds

In the fast-paced world of startups, getting funding is like finding your way through a complicated maze. From Pre-seed to Series B, there are lots of terms that can confuse even experienced investors. While you often hear terms like Pre-seed, Seed, Post-Seed, Series A, and more, their meanings aren't always clear, and there's no one definition that everyone agrees on. But one thing is for sure: funding usually moves from pre-seed to seed, seed to Series A, and so on. However, each round can vary a lot, from how much money is involved to how the company is valued.

For example, let's look at the recent funding rounds of Lohum, a company that recycles batteries. They announced a $14.5 million Series B round, but earlier, they had another Series B round for $23 million in August 2023. Interestingly, this new funding is just an extension of the previous round. So, why not call it something different?

Pushkar Singh - Co-Founder of Tremis Capital | Gist of LinkedIn Post 

Understanding the Hierarchy of Startup Funding Rounds: From Seed to IPO

Usually, each new funding round should be bigger than the last one. So, a Series C round should be larger than a Series B, which should be bigger than a Series A, and so on. But sometimes, things don't follow this pattern. In those cases, when a bigger round isn't possible, startups might add extra names or use unusual terms for their rounds, like Series B+, Series B1, B2, or even something like Pre-Series C.

Startup funding usually goes through several rounds, each with a specific purpose and for different stages of growth. While the names and details might vary depending on where you are and what industry you're in, here are the common funding rounds you'll encounter:

• Seed Round: This is the first round of funding where early investors give money to help the startup get started. It's often used to test the idea, build a prototype, or do market research.
• Series A, B, C, and Beyond: As a startup grows and proves it's viable, it might need more rounds of funding to grow and expand. Series A, B, and C are just names for these later rounds, which usually involve more money from big investors.
• Pre-Seed and Bridge Rounds: Sometimes, startups need money even before the seed stage, leading to pre-seed rounds. Bridge rounds are temporary fixes between big funding rounds to keep the company going.

Some startups even aim to go public and list their shares on a stock exchange through an IPO (Initial Public Offering) to raise more money from the public.

Recently, Bummer, a promising company in the underwear industry, raised Rs 9.25 crore, calling it a Pre-Series A1 round. While Pre-Series A is not unusual, adding "A1" makes things even more complicated. It makes you wonder, how many more prefixes and suffixes will we see?

There's speculation that Bummer might keep raising money with rounds called Pre-Series A2, A3, and so on. Even though the value might stay the same, it could change too. It's all very confusing.

In the world of startup funding, the size of a round doesn't always match its importance. Take Sprih and Indra, two clean technology startups. Sprih raised $3 million in a Seed round, while Indra got $4 million in a Series A round. And then there's AdOnMo, an advertising technology platform, which got $7 million in a Series B1 round, after raising $15 million in Series A in 2022.

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Demystifying Startup Funding Jargon: Key Terms Every Entrepreneur Should Know

Understanding different funding rounds is crucial for entrepreneurs, but it's not the only challenge. There's also a ton of industry jargon to deal with. Here are some common terms you might come across:

• Valuation: This is how much a startup is estimated to be worth, usually decided through talks with investors based on things like market potential and revenue.
• Term Sheet: It's a document outlining the key details of an investment deal, like the value, how much is being invested, ownership, and investor rights.
• Cap Table (Capitalization Table): It's a spreadsheet showing who owns what in a startup, including founders, investors, and employees.
• Convertible Note: This is a type of loan that can turn into ownership later, usually during another funding round or when certain goals are met.
• Runway: It's how long a startup can keep going with the money it has before needing more. It's crucial for planning and staying financially healthy.

Unlocking the Value: How Each Startup Funding Round Drives Real Progress

In the middle of all this confusing language, it's important to connect each funding round with a real achievement.  Pre-Seed funding starts the Minimum Viable Product (MVP) and gets initial customers. Seed funding helps get paying customers and improve the product. Series A funding is for making the product better, expanding to new areas, and finding a market for it. Series B funding is for more development and growth.

There are also "filler" rounds like Post-Seed, Pre-Series A, and the newer Pre-Series A1, A2, and so on. Even though the names can be confusing, these rounds help keep the momentum going until the next big round. The main focus is always on growing and hitting the goals needed for the next round.

So, when you hear about a Pre-Series A or a Post-Series A1 investment opportunity, it's essential to look beyond the name. Investors should ask about the founder's plans, the technology, how well it's doing in the market, and what's next for the product. In the world of startup funding, knowing what you're getting into is what helps investors find the best opportunities.

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