Startup Funding Stages: Navigating Seed to IPO in 2024

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Startup Funding Stages: Explaining the Differences

Startup Funding Stages

Finding the initial capital for your startup can feel nearly impossible when it is first launched. Most founders seek venture capital if they do not have personal or friends/family capital. If a startup decides to raise venture capital, it will most likely do so in multiple rounds and at various stages.

For example, when you raise the first capital for your business, this is referred to as the seed stage. The round names evolve as you grow and raise more capital. Following the seed stage, there is Series A, Series B, Series C, and so on. Below, we define and delve deeper into the various startup funding stages.

The Landscape in 2024

The landscape of startup funding is continuously evolving, with significant changes observed in 2023 that are shaping the trends for 2024. Understanding these shifts is crucial for any startup aiming to navigate the complex funding journey from Seed to IPO. Recent data indicates that the average Seed funding round has increased by 15%, with startups in high-growth sectors like fintech and AI leading the charge.

  • Seed Funding Growth: “In 2023, the average Seed funding round in the US increased to approximately $2.5 million, reflecting a 15% rise as investors show growing confidence in early-stage ventures.”
  • Series A Trends: “Series A funding rounds have also seen a notable increase, with the average round reaching $12 million, driven by investor interest in scalable tech solutions.”
  • Global Perspective: “Globally, regions like Southeast Asia and Africa are emerging as hotspots for venture capital, with a 20% year-over-year increase in early-stage funding in these markets.

Pre-Seed Funding Stage

Pre-seed funding has emerged as a new startup funding stage in recent years. This stage occurs so early in the process that it is not even considered a true startup funding stage. The pre-seed funding stage generally refers to the time when a startup is getting its operations up and running. During the pre-series stage, investors are unlikely to make an investment in exchange for equity in the startup. This stage can last a long time or you can receive pre-series funding quickly. It is determined by the nature of your startup as well as the initial costs that must be considered while developing the business model.

Pre-seed is typically the first round of institutional capital raised by a startup. In general, a pre-seed round allows a founding team to find product-market fit, hire early employees, and test go-to-market models. The size of pre-seed rounds varies greatly between companies. There is no hard and fast rule. According to research, pre-seed round sizes can range from $100,000 to $5 million. Finally, when determining valuations and how much to raise, you should consider your company’s needs.

As a general rule, funding should be available for 12 to 18 months. It should be sufficient capital to allow you to comfortably meet the goals and forecast you established during the pitching and fundraising process. One advantage of a pre-seed round is that it allows for more types of investors because the check sizes are generally smaller. Good starting points might be angel investors, accelerators/incubators, and dedicated pre-seed VC funds. For further information on early fundraising, read more here.

Seed Funding Stage Seed Round Funding

Seed funding is the first of the true startup funding stages and is frequently provided by angel investors, friends and family members, and the original company founders. A startup in its early stages may seek funding through bank loans, but angel investments are usually preferred. Seed funding is used to start the company, so it carries a high level of risk. The company has yet to establish itself in the market. Many angel investors specialise in seed funding opportunities because it allows them to purchase a portion of the company’s equity when it is at its lowest valuation. Additionally, becoming an early investor allows them easier access to invest again at later startup funding stages.

Raising seed-stage funding is a significant achievement for a startup. The initial infusion of capital into the business is known as seed-stage funding. A startup is mostly an idea at this point, with little to no revenue. This is typically the stage at which a product and go-to-market strategy are built and developed. For more information or help on how to get funding at the seed stage, read more here, or here to learn more about seed investors.

Following the completion of a seed round, a founder has three options. The first, and most common, is discovering that the time is not right for the startup, and the startup fails. The second is discovering that the seed stage capital was all that the company needed to get started and that it can fund the business’s growth through customer revenue and debt financing. The final and most traditional route is to raise future startup funding rounds such as Series A, Series B, Series C, and so on.

Series A Funding Stage

After raising a seed round, it’s time to move onto later startup funding stages. The prospect of Series A funding can be intimidating for many startups, but it can also be a make or break moment for a company. Stock options are typically sold to the company’s founders, those close to them, and angel investors when the company is first founded. Following that, a preferred stock in the form of a Series A can be sold to investors. Series A allows investors to get in early on a company in which they have a strong belief. It’s a win-win situation for both the company and the future stockholders.

Series A funding can be challenging because it also necessitates a Series A valuation. The company must be valued and priced at the time of Series A funding. Previous investments must be considered, as previous investors will have purchased the business at a specific valuation. If an angel investor invested $100,000 in the company just months ago, new investors may be hesitant to invest at a $10,000,000 valuation today.

The average Series A funding round has grown substantially over recent years, jumping 30% from 2020 to 2021, ending the year at $22.2 million. Currently in 2022, the average is above $23 million as well. It is, however, important to note that this average being referenced is the mean round size for this startup funding stage, and is much higher than the median. In 2021, the median early funding stages size, which includes both Series A and Series B, was around $8 million. 

Acquiring Series A Funding

Various factors, including management, size, track record, risk, and growth potential, influence a company’s valuation. Businesses can call in analysts for a professional valuation. During a Series A funding round, a company usually does not have a proven track record and may be more risky. During a Series A round, investors can typically purchase 10% to 30% of the company. Series A investments are typically used to expand the business, often in preparation for market entry. During its Series A round, the company will be able to decide how much it wants to sell and may want to retain as much company control as possible.

Following the completion of the funding round, the company will typically have working capital for six to 18 months. From there, the company may be able to go to market or move on to the next round of funding. The Series A, B, and C funding rounds are all based on the stages of development that the company goes through. It is critical to remember that when you raise your Series A, you are establishing goals and objectives for what that capital will do for your company. You must raise sufficient capital to help you achieve these objectives so that you can proceed to raise a Series B or future round of capital.

Series B Funding Stage

After a company has been launched and established, it may require Series B funding. A company will only receive Series B funding after it has begun operations and proven its business model. Series B funding is typically less risky than Series A funding, so there are more interested investors.

The company begins with a valuation, as it does with Series A funding. From there, it announces that it is seeking Series B funding. The company will sell its equity at the agreed-upon valuation, and investors are free to make offers based on that valuation. A startup that receives Series B funding is already more successful than many startups that do not raise more than their initial seed capital. The average amount of capital raised during this startup funding stage is around $33 million.

Acquiring Series B Funding

Series B funding is sometimes provided by the same investors who provided Series A funding. In other cases, Series B funding may come from additional investors or investment firms. In either case, investors will typically pay more for less equity than they did in previous funding rounds because the company’s valuation will have scaled. A Series B funding valuation must take into account the company’s current performance as well as its future growth potential.

Analysts can be used to determine the value of a company seeking Series B funding. It should be noted, however, that the company has more negotiating power as a Series B company because it has proven to be successful.

After obtaining Series B funding, the company must use the funds to further stabilise, improve its operations, and grow. The startup should be in a good position at this point. If the startup requires additional funds to grow and expand after it has developed, it may need to embark on a Series C funding round.

Series C Funding Stage

Series C funding targets startups that have already proven their business model but need additional capital for expansion. Like Series B investors, investors at this stage are frequently entrepreneurs and individuals who have previously invested in the company. When seeking Series C funding, a startup may first approach its angel investors, Series A and Series B investors. If a startup has received Series C funding, it is already quite successful. Unlike earlier stage rounds that help a startup gain traction and grow, a startup raising its Series C round has already established itself and is experiencing growth.

Because the company is already established and only requires funds to grow or expand, it is less likely to be a risk. At this point, the startup is no longer a “startup,” but rather a well-established company with a proven business model that needs to expand its product offerings, enter new markets or increase its marketing output. A company can make strategic investments by raising a Series C round. This could imply investing in market expansion, new products, or even the acquisition of other businesses. The average size at this startup funding stage is generally around $50 to $60 million.

Acquiring Series C Funding

When approaching a Series C, the strategy will most likely differ from previous rounds. As previously stated, the average is around $50M. This means that earlier round investors with checks ranging from $1 to $5 million are less likely to lead a round. Previous investors may be eager to invest in your Series C, but startups will need to raise the remaining funds from other sources. Your company will most likely speak for itself and receive more inbound investor requests. These investors are likely to be later-stage venture capital funds, private equity firms, and banks.

Later Startup Funding Stages

Depending on the business strategy, a Series C round of venture capital financing may be the end of the road. At this point, the company is most likely on the right track and controls a sizable portion of the addressable market. Some companies, however, go on to raise their Series D, Series E, Series F, and even Series G.

2024 startup funding stages

Series D Funding Stage

If the company’s Series C funding round falls short, it may need to hold a Series D funding round, which often carries significant business implications. Series D funding typically occurs when a company fails to meet its targets with Series C funding, leading to a drop in valuation. A lower valuation is generally detrimental to the company.

If Series D funding becomes necessary due to the company’s ongoing challenges, it might be the only way for the startup to survive. However, this process generally devalues the company and can undermine future investor confidence.

Series E Funding Stage

If Series D funding is insufficient to meet the company’s capital needs, Series E funding may be required. This is, once again, a very bad sign, and very few companies will make it to Series E funding. Investors will grant Series E funding only if the company has been unable to raise sufficient capital and is still struggling to remain active and private.

Series F & G Funding Stages

Finally, while very few companies will receive Series F or Series G funding, it is possible. Because capital is so central to their operations, some well-known financial services have received Series F or Series G funding. Every round of funding represents a new opportunity for the company, but it also has the potential to dilute the company’s equity and valuation. Like with the other later startup funding stages, however, it is typically not the best look.

Initial Public Offering (IPO)

The process of offering corporate shares to the general public for the first time is called an IPO. Growing startups in need of funding frequently use this process to raise funds, whereas established organisations use it to allow startup owners to sell some or all of their ownership to the general public.

When a startup decides to go public, a series of events takes place during the IPO process. These are: 

  • The formation of an external public offering team composed of underwriters, lawyers, CPAs, and SEC experts.
  • Compilation of startup information, including financial performance and anticipated future operations.
  • An audit of the startup’s financial statements is performed, resulting in an opinion about its public offering.
  • The startup submits its prospectus to the SEC and sets a date for going public.

The ability to raise funds for a startup is not the only advantage that entrepreneurs gain from a public offering. Other benefits include:

  • Because it already has access to public markets, a public organisation can generate additional funds through secondary offerings. 
  • Many public companies compensate executives with stock. The stocks of a public organisation are more attractive to employees as the stocks can be sold easily. Being public also allows an organisation to attract better talent.
  • Mergers are simpler for a public company because it can use its public shares to acquire another startup.

Other Options for Funding

In recent years, crowdfunding has become an increasingly popular option for early-stage startups, especially in niche markets. Platforms like Kickstarter, Indiegogo, and GoFundMe have provided startups with alternative avenues to secure initial capital, validate their products, and build a loyal customer base.

  • Crowdfunding Growth: In 2024, experts anticipate that crowdfunding will facilitate over $10 billion in funding globally, establishing it as a significant player in the early-stage funding landscape.
  • Best Practices: Successful crowdfunding campaigns often feature compelling storytelling, transparent communication with backers, and strategic use of social media to build momentum.

Venture debt is gaining traction as a complementary option to traditional venture capital, particularly for startups in the growth stage that seek to scale without diluting equity.

  • Venture Debt Market Growth: In 2023, the global venture debt market expanded by 25%, underscoring its growing importance. We expect this trend to continue into 2024 as more startups look to balance debt and equity.
  • When to Consider Venture Debt: Startups typically consider venture debt when they have a solid revenue stream but need additional capital to fuel growth, expand into new markets, or bridge the gap to the next equity round.

Case Studies

Learning from the journeys of successful startups can provide invaluable insights into what works at each funding stage.

  • Stripe’s Series G Funding Round: Stripe, the payment processing giant, successfully raised over $600 million in its Series G round in 2023, reaching a valuation of $95 billion. This round exemplifies the importance of strong financials, a clear growth strategy, and investor confidence in the company’s future.
  • Revolut’s Funding Journey: Revolut, a UK-based fintech company, navigated multiple funding stages, including a $500 million Series D round in 2021, leading to a $33 billion valuation by 2023. Revolut’s success highlights the importance of scaling quickly and expanding into new markets to attract significant investor interest.

Not all startups succeed in navigating the funding journey. Analyzing failures can offer critical lessons.

  • Quibi’s Rapid Rise and Fall: Quibi, despite raising $1.75 billion in venture capital, struggled to gain user traction and shut down just six months after launch. This case underscores the critical importance of product-market fit, understanding customer needs, and the timing of a product launch. Even with substantial funding, misalignment between the product and market demand can lead to failure.

FAQs – Startup Funding Stages

  1. What is the most important factor investors look for in a Seed stage startup? “The most important thing we look for in a Seed stage startup is the team. A great idea is important, but a strong, resilient, and adaptable team is crucial for navigating the challenges of early-stage growth.” Paul Graham, Co-Founder of Y Combinator:
  2. How should a startup prepare for a Series A funding round?  “For a successful Series A, startups need to demonstrate clear product-market fit and a scalable business model. Investors want to see that there’s not just a great product, but also a growing, engaged customer base.” Peter Thiel, Co-Founder of PayPal and Partner at Founders Fund
  3. What are investors looking for in later-stage funding rounds, such as Series B and beyond? “In later-stage rounds, it’s all about growth and scalability. Investors are looking for evidence that the company can expand rapidly while maintaining operational efficiency and strong unit economics.” Reid Hoffman, Co-Founder of LinkedIn and Partner at Greylock Partners
  4. Is profitability crucial before seeking venture capital? “Profitability isn’t always necessary early on, but a clear path to profitability is. Investors want to see that you have a plan to turn a profit once the initial growth phase is over.” Mark Cuban, Entrepreneur and Investor

Conclusion

Entrepreneurs can scale their startups at any stage of their entrepreneurial journey thanks to the various startup funding stages. This scaling practice enables them to determine where their startup stands and which potential investors would invest in it to help it grow. For more information on raising funds for your startup, read our related blog post Fundraising for Startups.

Remember that startups must be mature enough to qualify for a specific funding round to receive funding. The net worth of your startup can tell you where it stands.

Many startup founders retire after their companies go public. Many of them would rather become angel investors and invest their hard-earned money in other startups. After all, they’ve earned the right to unwind and advise other entrepreneurs on how to grow and profit from their startups.

Amit Khanna // Deep Tech Startups

Amit Khanna, 7startup Founder

Amit is an investor and advisor with two decades of experience and an MBA. He supports entrepreneurs with fundraising & go-to-market expansion in Saudi Arabia. His strategy is built on two pillars: deep investment acumen and a vast operational network. Reach out to us today and see if we’re a fit!

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