If you haven’t pursued equity financing, it can be hard to know what to expect. As you lay awake dreaming of what a successful funding round will mean for your business, questions of your potential shortcomings may arise:
- What are the differences between each startup funding round?
- Which funding round matches my startup’s current lifecycle stage?
- How can I be as prepared as possible?
This timeline infographic explains the seven essential types of startup funding stages and the financial expectations associated with each one.
Family and Friends Funding Round
Just as it sounds, the friends and family round is when you reach out to your personal network for smaller investments in your company, generally under $500,000. These folks won’t require you report much about your finances—in fact, they may be close enough to have a good idea already.
Once you demonstrate sales potential and understand your market, it’s time to look for equity capital. Because businesses are usually still developing at this round, angel investors invest in many early-stage companies simultaneously. If a company does well, investors can reinvest in a future round. This round has few, if any, financial reporting requirements but you will need a rock-solid business model.
Seed Funding Round
A seed round is the first big round of funding a startup seeks from outside investors. Depending on the type of company, this round generally yields around under $2 million or less. Investors in a seed round want their portfolio companies to grow as quickly as possible and spend investor money only on the absolute necessities. Aside from tax-compliance, your financial reporting requirements can differ from investor to investor but are usually pretty minimal.
Series Seed Funding Round
A series seed is a “bridge” round of financing larger than an average seed round but not quite on par with a “Series A.” Financial reporting requirements are the same as a seed round.
Series A Funding Round
Series A rounds can include a mix of old and new investors. Investments from this round are typically at the $5 million mark and above. The higher return is partially due to the fact that most startup founders begin pitching to the name brand venture capitalists in their industry at this point. Series A is where things get a bit more serious. At this stage, investors expect to see GAAP (Generally Accepted Accounting Principles) financials at their board meetings.
Series B+ Funding Round
Additional rounds like Series B and beyond offer bigger investments around $10 million or more. This is where larger, more established funding institutions normally jump into the game. If they haven’t already, most companies will move their accounting functions in-house at this point and hire a CFO or COO to oversee the financial reporting and other funding-related operations. There is almost always a strict GAAP reporting requirement.
An Alternative Route: Venture Debt/Debt Financing
While we’re focusing on fundraising, it’s important to note that some startups may prefer other funding routes. Opening a line of credit at a credit union or bank is one way of accessing large amounts of capital without giving up a stake in the business to a board of investors. Financial institutions always require GAAP financials as a means of managing risk. The trade off for venture debt? Higher interest rates.