Tuesday, March 15, 2011

How Funding Rounds Differ: Seed, Series A, Series B, and C...

Over the weekend, I have written a series of posts about how to raise a series A, and why this differs pretty dramatically from raising a seed round.  I thought it might help to first clarify the difference between the various funding rounds and their characteristics.

What Is the Difference Between Series Seed, Series A, Series B and Series C-Z funding rounds?
To some extent, the names of rounds are kind of arbitrary. E.g. in some cases a round is called “series A” simply because it is the first, or “A” funding the company has taken from external sources versus a specific stage of traction for the company. However, in most cases a Series A will reflect the stage of a company and its product.

Series Seed: Figuring out the product and getting to user/product fit.
  • Purpose: The purpose of the series seed is for the company to figure out the product it is building, the market it is in, and the user base. Typically, a seed round helps the company scale to a few employees past the founders and to build and launch an early product. As the product starts to get more and more users, a company will then raise a series A.
  • Amounts: Typically the range is $250K-$2 million (median today of probably $750K to $1million). The high end of this range used to be more typically $1million, but we are in the inflationary period of a venture cycle, and this number may move up into the millions of dollars before we have a correction.
  • Who invests: Angels, SuperAngels, and early stage VCs all invest in seed rounds.

Series A: Scaling the product and getting to a business model. (AKA getting to true product/market fit)
  • Purpose: With a series A you typically have figured out your product/userbase, and need capital to:
    • Figure out or scale distribution. Your users may love your product, but you have not yet optimized all the ways to build a userbase.
    • Scale geographically or across verticals. You have a product that works in one market (e.g. it works in the Bay Area), and you want to adapt it to other markets (lets launch it across the US or globally).
    • Figure out a business model. If you are a consumer internet company, you may be getting lots of users, but may not have a clear business model that is working at this point (see e.g. Instagram).
  • Amounts: Used to be $2m-$15million with a median of $3-$7 million.  Series A amounts have gone up dramatically recently to more of a $7-15million raise being typical.
  • Recent examples: Uber(cab) raising from Benchmark, Instagram's raise from Benchmark
  • Who invests: Your traditional venture funds (Sequoia, A16Z, Benchmark, Accel, Greylock, Battery, CRV, Matrix etc etc.). lead these rounds, leading to a pretty different dynamic relative to a seed round (more on this in another post).  Angels may co-invest with VCs in the A, but they have no power to set the pricing or impact any aspect of the round.

Series B: Scaling the business.
  • Purpose:  The Series B is typically all about scaling. You have traction with users, and typically you also have a business model that has come together. If your user traction is out of control, sometimes you can raise a Series B without an existing business model, as most VCs assume you can eventually monetize large #s of eyeballs.
    • Scale your business model. You need to hire a bunch of ads sales people, enterprise sales people, or the like
    • Scale your userbase. You have a great business in the US and want to go after Europe.
    • Make acquisitions. Sometimes a Series B is raised to buy other companies.
  • Amounts: Anywhere from seven million to tens of millions.
  • Recent Examples: Although it was called a “series A” in the press (and probably on the financing docs), Angry Birds recent $40 million funding by Accel was more similar to a series B or C financing. The company already had great user traction and was making lots of money. For the company to scale its existing business, as well as move into new lines of business, additional capital was needed.
  • Who invests:  Some series B are led by the same folks as your Series A (e.g. Square and Sequoia), but also some additional firms who specialize in later stage deals such as IVP, GVVC, Meritech, DAG, etc. start to get involved at the Series B stage.

Series C onwards: More capital to scale.
  • Purpose: The Series C is often used by a company to accelerate what it is doing beyond the Series B. This may include:
    • Continue to grow fast. You know where the profits are, but you are making the tradeoff of losing money in order to win the market.
    • Go international.  Launch your business in other markets.
    • Make acquisitions. Some people raise big war chests to buy a number of other companies.
  • Amounts: This can range from tens to hundreds of millions.
  • Who invests: This can be driven by the folks mentioned for Series A or B (see e.g. all the early stage guys who just funded GroupOn), but often other sources of capital may invest in later rounds such as private equity firms, hedge funds, the mezzanine or late stage arms of Goldman Sachs, Morgan Stanley and other investment banks, or big secondary market firms such as DST or Tiger.

See also: How To Raise Series A / VC Funding

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