Ever since the market took off during the second half of 2020, investor capital has been raining down seemingly everywhere. Record IPOs, largely driven by SPAC or so-called “blank check” mergers and acquisitions, and a 30% uptick in venture capital raised during 2020 versus the year before, according to Forbes, powered the shift.
Much of that venture capital went to big, established players, which may explain a new-ish phenomenon: an uptick in late-stage funding rounds like Series D and E. (Even Series F rounds are a thing now—just look at social fitness app Strava’s recent $110 million haul.)
Some startups can make it big without investor capital, but most need cash injections to grow and scale. Those injections are grouped into a round of funding, delineated by an initial early-stage seed round and then letters—A,B, C and so forth. These startup funding rounds can tell you a lot about where a company stands in terms of maturity, size, scale, and opportunity. But as the stage of funding list gets longer in recent years, you may be wondering what each one signifies these days.
Here’s a cheat sheet on the stages of startup funding.
The seed round is the earliest round, often raised when a business has just launched or even earlier, when it’s largely in the startup founder’s head. Seed capital can be self-financed—a founder sinking their own money into a venture to start off—or it can come from a range of sources, like friends and family, angel investors, or startup accelerators and incubators. Venture capital usually gets involved later in the game once there’s revenue and the firm has demonstrated a market for their product or service.
If a company has landed a first round of seed funding from a VC firm, that's typically an indication that investors see a market opportunity, and are willing to see if the founder can gain traction in the marketplace with their idea.
Series A funding round
Typically Series A investors come once startups have an established revenue stream and a decent projection for growth in the near-to-medium term—and a plan to use capital to keep the momentum going, like building out a team with more employees.
Investors—often venture capital firms—typically receive equity in the form of preferred shares in exchange for their Series A investment. Investopedia says Series A rounds typically range from $2 to $15 million. As of May 2021, the average Series A deal in the U.S. was $17.8 million, according to startup database Fundz. That number is higher than previous years due to a surge in biotech mega rounds skewing the numbers; the median deal is much lower, around $8 million. There were more than 600 Series A deals in the U.S. during 2020, according to Fundz.
Series A rounds signify investor confidence in the viability of the company and product-market fit—that it can grow, but needs resources to do so.
Series B funding round
Series B deals are typically struck between startups and venture capital firms trading equity (preferred shares) for cash. According to the Corporate Finance Institute, the Series B round typically occurs when companies have stable revenue streams, possibly turn a profit, and have at least a $10 million valuation.
Series B investors are more likely to care about key metrics like growth rates, burn rates, and annual recurring revenue—indicators that may not have been available during the Series A. The other side of that coin is that investors might have higher or firmer expectations than they did during the Series A, now that the business is more established.
Though they may not be profitable yet, companies with Series B funding have typically reached some semblance of financial maturity, with more predictable revenue streams built from Series A investments and a good outlook for growth.
Series C funding round
Series C-round funding is typically reserved for more-established companies that are no longer startups. By now, the later-stage companies have established customer bases, steady revenues, and likely even profits. The Series C usually serves as a means to double down on success already achieved—whether that’s by continuing to expand, launching in a new market, funding research and development, or acquiring another company.
According to the Corporate Finance Institute, Series C rounds tend to attract a new investor profile versus the previous rounds—namely established financial institutions like investment banks, hedge funds, and private equity firms. They’re more willing to get in on the action at this stage due to the reduced risk profile of the more-established firms that typically receive Series C funding.
According to Embroker, the average Series C round raises $50 million on a $100-$120 million valuation.
Because of their high valuations, Series C-backed companies have typically firmly established their viability in the marketplace (although they, too, may not be profitable yet) along with a clear path to expansion. They’re also likely to have growth plans and forecasts that have been rigorously vetted by venture capitalists and other institutions putting up capital.
Series D funding, Series E funding, and beyond
Before 2020, Series D and E funding rounds weren’t so common (this list of funding stages from CrunchBase doesn’t even mention them, for example). Previously, companies often staged an initial public offering or devised another exit strategy after the C-round.
That changed in 2020. Capital froze during the March pandemic crash. As it unfroze and markets boomed, more capital became available. Investors, eager for returns in a low-interest-rate environment, turned to venture capital as one place to park their money, says Clari CFO Alyssa Filter. At the same time, innovative startups and next-generation technology companies needed cash to capitalize on changes happening on the ground, like accelerated digital transformation or surging ESG interest.
Take Clari. We raised $150M during our Series E this year after a $60M Series D during October 2019. During the pandemic, distributed revenue teams needed full visibility into their revenue operations to be able to pivot with the market. Plus, amid the flurry of SPAC mergers and IPOs, revenue ops leaders needed a clear picture of financial health and clear, accurate forecasts to attract investors. Demand and usage surged, and the capital helped us support our accelerated growth.