The Complete Guide to Understanding the Rounds of Venture Capital Funding (2024)

Are you new to the world of venture capital (VC) funding? Confused by the alphabet soup and gardening references when people talk about things like seed funding or Series A? You've come to the right place! This article will provide a quick overview of how venture capital works and break down the various VC funding rounds, including size and what stage startups are usually at.

What is Venture Capital Funding?

Venture capital is a type of funding that aims to achieve outsized returns by placing risky bets in early-stage, high-growth companies. VC is solely reserved for highly scalable businesses that have the potential to reach at least $1bn in valuation within 10 years; so VC is not an option for services businesses like agencies or niche businesses that might be serving a single locale. This is because VC returns are predicated on getting 100x returns on their best-performing businesses, which could be just 10% of their portfolio, while the rest fail or return very little. There needs to be a massive upside in a company for a VC to be interested.

Venture investors invest money in exchange for equity, an ownership stake in the business. VCs get their returns upon an "exit," which ideally comes in the form of an initial public offering (IPO) on a stock exchange, where they can then sell their ownership stakes, or an acquisition by a larger company.

Venture capital investors are usually VC firms that raise capital from wealthy individuals, family offices, sovereign wealth funds, and large endowments. At the earlier stages, angel investors, or wealthy individuals investing their own capital, will also be involved. In later stage rounds, traditional private equity firms might get involved, and even investment banks.

Check out our database of over 1500 venture investors

Startup Funding Rounds: An Overview

A funding round refers to the process of raising capital from investors in a series of rounds, each with its own set of investors, valuations, and investment amounts. Some investors will invest in multiple rounds with a company.

The earliest funding rounds are called seed stage, before getting into Series A, Series B, and so on until an exit. In each round a startup sells about 20% equity or ownership of their company - so each round dilutes the founder's ownership by one-fifth.

Pre-Seed Funding

• Size:$10,000 - $1 million
• Stage: Idea or early concept
• Investors: Friends and family, angel investors, accelerators, equity crowdfunding

At this stage, startups are typically still developing their product or service. Founders often use their own savings or turn to their immediate network for initial capital.

Seed Funding

Size: $500,000 - $5 million

Stage: Prototype or early product development

Investors: Angel investors, early-stage venture capital firms, accelerators, equity crowdfunding

Seed funding helps startups refine their products, conduct market research, and begin building a customer base.

Series A

• Size:$2 million - $20 million
• Stage: Product-market fit and initial traction
• Investors: Venture capital firms, some angel investors

Series A funding typically focuses on scaling the business model. Companies at this stage usually have an established user base and consistent revenue streams.

Series B

• Size:$15 million - $50 million
• Stage: Established business model, expanding market reach
• Investors: Venture capital firms, late-stage VCs

Series B funding helps companies expand their market reach and scale operations. In 2024, the median pre-money valuation for Series B rounds decreased compared to previous years.

Series C and Beyond

• Size:$50 million+
• Stage: Rapid growth, potential IPO preparation
• Investors: Late-stage VCs, private equity firms, hedge funds, banks

These later stages focus on rapid expansion, often including international growth or acquisitions. Series C funding is a critical phase for startups that are already successful and looking to scale further. Series F funding is typically sought by capital-intensive businesses aiming for significant growth. Series G funding is pursued by companies preparing for significant milestones such as an IPO or market expansion. In Q2 2024, Series D and later rounds showed significant growth in invested capital, increasing from $1.2 billion in Q1 to $2.2 billion.

How Funding Rounds Work

Funding rounds involve pitching, negotiating, and closing deals with investors. Fundraises are done as rounds, as each stage will have different terms on which the money is raised. Most notably, the valuation will be set at each funding round, which determines how much equity each investor receives in return for their investment.

The funding round valuation refers to the process of determining the value of a company before a fundraising. It’s more of an art than a science in determining a valuation and includes many factors, such as current or predicted future revenue, the prior experience of the founders (Elon Musk’s new company will get a higher valuation at seed funding than an untested founder), market size, and risk.

Generally, a round will have a lead investor who sets the basic terms of the deal, and the startup will then raise the rest of the money from other investors. Thus, it’s generally very important for a founder to pin down that lead investor as quickly as possible in order for the funding round to come together.

When I raised for my prior company, Taskable, we had been talking to several investors who appeared interested. However none of them were committed. Then we were able to lock down the first check from a well-known investor, and many of the investors we'd previously been talking to committed pretty quickly thereafter.

Alternatives to Venture Capital Funding

Not every tech company needs to raise venture capital. Ideally, you generate early revenues that allow you to keep investing in and growing the company - this is known as bootstrapping, and means you don't have to give up any equity or control in your company to outside investors. However, this process would likely not allow you to grow as fast as you would if you raised VC.

Grants are another option, particularly for startups working in deep tech or science. Grants are sort of "free money" in that you don't have to pay them back generally, and they don't involve giving up equity. You likely have to do some reporting for the grantmaker. These generally come from governments who are trying to incentivize research or growth in a given technological field.

Some small business loans might be available to startups - though these are generally reserved for non-growth businesses who have less risk.

The final alternative is crowdfunding - either equity or rewards-based. Equity crowdfunding through sites like Republic works just like a VC investment, except you raise many from many small investors via an online platform. Rewards-based crowdfunding platforms like Kickstarter allow you to raise funds in exchange for some reward, ranging from stickers, to the product itself, to some VIP or exclusive acess.

The Role of Venture Capitalists

Once invested, some venture capital firms and the partners will take board seats and advisory roles with the company, helping connect you with potential customers, employees, and future investors. Other firms and investors will take a more hands-off approach, or will help early on and then back off as you raise future rounds and get more experienced investors on board. When evaluating investors, its important to take into account how much you think they can help and how valuable their network is. Leading venture capital firms such as Sequoia and Benchmark will have the biggest networks and support systems, and thus will be more valuable to your startup.

Preparing for a Funding Round

If you're thinking of raising money, it's important to go into the round prepared. There's way to much to write on this subject to squeeze into a paragraph so check out Y Combinator's guide to seed funding. Below is the quick overview of the basics.

Create a Compelling Pitch Deck

Your pitch deck is often the first impression investors will have of your company. It should be:

• Concise (typically 10-15 slides)
• Visually appealing
• Focused on key metrics and milestones
• Tailored to your audience

Include slides on your problem statement, solution, market opportunity, competitive advantage, team, and financial projections.

Validate Your Product and Market

Before approaching investors, you should have:

• A functioning prototype or minimum viable product (MVP)
• Some level of market validation (e.g., early customers, user feedback)
• Demonstrated product-market fit

This shows investors that there's genuine demand for your solution.

Understand Your Financials

Be prepared to discuss:

• Your current financial situation
• Projected revenue and expenses
• Cash flow forecasts
• How much funding you're seeking and why
• How you plan to use the funds

Use a startup financial model to project your growth and funding needs.

Build a Strong Team

Investors often say they invest in people, not just ideas. Make sure you have:

• A skilled and diverse founding team
• Key hires in place or planned
• An advisory board or mentors (if possible)

Highlight your team's relevant experience and track record of success.

Research Potential Investors

Identify investors who are a good fit for your startup based on:

• Industry focus
• Investment stage (e.g., seed, Series A)
• Typical investment size
• Geographic preferences

Tailor your pitch to each investor's specific interests and requirements.

You can view our database of over 1k investors here

Prepare for Due Diligence

Get your documents in order, including:

• Financial statements
• Legal documents (e.g., incorporation papers, contracts)
• Intellectual property documentation
• Customer and partnership agreements

Being organized will speed up the due diligence process and demonstrate your professionalism.

Network and Build Relationships

Start building relationships with potential investors before you actually need funding. Attend industry events, join startup communities, and leverage your network for introductions. By thoroughly preparing in these areas, you'll be in a strong position to approach investors and successfully raise funds for your startup. Remember, fundraising is a time-consuming process, so start preparing well in advance of when you actually need the capital.

• Preparing for a funding round involves developing a solid business plan, financial projections, and a clear pitch.
• Companies should also prepare a list of potential investors, and develop a strategy for approaching them.
• It is also important to have a clear understanding of the company’s valuation and equity structure.

Conclusion

Venture capital funding is a crucial source of financing for early-stage startups that want to grow quickly. Before fundraising, make sure you're prepared and ready to fundraise, and start networking as soon as possible. Good luck!

FAQs

What is venture capital?

Venture capital is a type of funding provided by investors to early-stage, high-growth companies in exchange for equity, or ownership stakes. These investments are considered high-risk but have the potential for high returns, particularly when the company achieves significant milestones such as an IPO or acquisition. Venture capital is typically reserved for scalable businesses with the potential to reach a valuation of $1 billion or more within a decade.

What is Series A funding?

Series A funding is the first significant round of venture capital financing that a startup typically raises after seed funding. It usually ranges from $2 million to $20 million and is used to scale the business model, focusing on increasing the company's user base and revenue streams. Investors in a Series A round are often venture capital firms and sometimes angel investors.

What is a go-to-market strategy?

A go-to-market (GTM) strategy is a detailed plan that outlines how a company will sell its product or service to customers. It includes identifying the target market, crafting a value proposition, setting pricing, choosing distribution channels, and creating a marketing and sales plan. The goal is to ensure the product or service reaches the right customers effectively and efficiently.

What are private equity firms?

Private equity firms are investment firms that acquire or invest in companies, often with the intention of improving their value before selling them at a profit. They focus on established companies, using various strategies to enhance profitability, such as restructuring, operational improvements, or growth initiatives. These firms generally hold investments for a few years before exiting through a sale or public offering.

Venture capital is a type of private equity.

What do private equity firms do?

Private equity firms invest in companies, often acquiring them outright or taking a significant ownership stake, with the goal of improving their profitability and eventually selling them at a profit. These firms typically invest in more mature companies than venture capital firms and may use leverage (borrowed money) to finance their acquisitions. They focus on restructuring, optimizing operations, and driving growth before exiting the investment through a sale or public offering.

What are angel investors?

Angel investors are wealthy individuals who provide early-stage capital to startups, often in exchange for equity. They usually invest their own money and may also offer mentorship and networking opportunities to the startups they fund. Angel investors are typically involved in the seed or pre-seed stages of funding.

How to find angel investors?

To find angel investors, start by networking within the startup community, attending pitch events, and joining startup incubators or accelerators. Online platforms like AngelList and LinkedIn can also help you connect with potential angel investors. It's important to research and approach investors who have experience in your industry and align with your business goals.