Series Funding for Startups and How It Works

Startups need money to grow, whether they’re manufacturing a new product or marketing their brand. When resources are limited in the early stages, series funding can be essential to establishing or scaling your operations. 

About 90% of all startups fail, and 82% of them fail because they run out of money. While budgeting is essential to maintaining a sustainable cash flow, startups also need to put their best foot forward to secure funding.

What Is Series Funding?

Series funding, or equity funding, is a way for startups to raise capital. In the early stages, a founder, or the co-founders, may be limited in the amount of money they have to support the company. 

So startups use the series funding process to acquire funds in exchange for equity. Startups get the capital they need, while investors get to own a part of the business. If the startup succeeds and becomes highly valued, the investor could reap the rewards.

How Does Series Funding Work?

Funding for startups often goes through a series of rounds, from seed to Series A, Series B, Series C, and beyond. In the initial stages of a startup, the founder and any close supporters, like friends or family, might provide the money necessary to establish the business. 

From there, startups can pitch to investors, which can also include family and friends, but usually include venture capitalists or angel investors.

Pre-Seed Funding

At the pre-seed funding stage, the company founders and perhaps a close-knit group of supporters, like friends and family, are providing funds to get started. The founders are likely developing a proof of concept, establishing a pilot project, or building product prototypes. 

Pre-seed funding usually raises around $100k to $1m. This is usually not considered a step within the rounds of funding.

Seed Funding

Seed funding is considered the first stage in external funding and is designed to help get a business officially off the ground, like a seed preparing for growth. This stage raises an average of about $3.6m.

Seed funding, which may be provided by family, friends, angel investors, venture capital firms, or incubator programs, is ideal for companies who have their initial ideas set. They can use the money to finish developing products or hone in on the target audience. 

Series Funding Rounds

After the seed stage, the process goes into series funding rounds. At this point, a startup typically has more than a few product prototypes and a defined target audience. They’ll need a fully fledged business plan that shows how the company will be sustainable and earn profits in the future. 

Even companies that have gained a lot of attention and early supporters will need to show a sustainable, long-term business plan if they want to secure funding from venture capital investors. 

Series A Funding

Only about one in three startup companies go on to raise money in Series A or later rounds after the pre-seed or seed stages. In 2022, Series A funding reached about $70B globally, spread between ~4k startups. Startups raise a median of $12m in Series A.

Commonly, investors in this round include top venture capital firms. During this round, startups usually exchange about 15% to 25% equity for investments. 

If a startup doesn’t make it to a Series A round, the company may instead opt for equity crowdfunding, in which a startup can gain support and investments online in exchange for equity.

Series B Funding

Many startups enter a Series B round about 1.5 to 2 years after completing a Series A. By the Series B round, companies have proven they not only have an innovative idea but also they have some initial success and a plan for the future. This is attractive to investors, as the business is less risky at this point.

Startups typically use Series B funding to expand the business, which could look like increasing its advertising budget or hiring more employees.

Funding amounts at this round vary widely, from around $5m to $50m. The median amount is about $25m.

Series B also sees a lot of venture capital firms. Those who invested in Series A may reinvest in subsequent rounds to maintain a larger share of equity.

Series C Funding

Companies that make it to Series C are usually successful and ready to scale, perhaps by introducing new products or branching out into new markets. At this stage, the startup could even be considering acquiring other companies.

So far in 2023, Series C round for startups in the US has raised a median of $42m and an average of $59m. The average amount of equity to offer at the Series B and C rounds is usually around 15%.

At this round, the startup can attract more late-stage investors, including private equity firms or large financial institutions. The deeper into the series funding rounds, the lower the risk, but the potential upside tends to decrease for investors in later rounds.

Series D Funding

Some companies stop fundraising after Series C, but startups can choose to continue with further rounds, including D and E — or beyond. 

In some scenarios,  a startup may require a Series D round if they aren’t hitting targets outlined in Series C. This would mean the startup’s valuation has declined and they are in a “down round” to raise money. 

In more positive circumstances, the company may just want to remain privately held for longer or may want to increase their valuation before approaching an IPO.

Because the circumstances surrounding a Series D round for a startup can vary widely, the amount of funding is difficult to average. In 2021, the median funding for US startups in this round was about $100m. 

But if a startup is participating in a Series D as a down round, the company may struggle to raise funding, as it is missing its business goals.

Series E Funding

Relatively few startups go through a Series E round, but the reasons are the same as for pursuing a Series D round. 

The startup may be missing the mark on its expectations outlined in earlier rounds, or it could want to stay private for longer. The startup may also want to expand further and increase its value just before an IPO.

For startups that participate in D or E funding, they can expect to offer about 5% to 15% of their total equity to investors.

How Many Series Funding Rounds Does a Startup Need?

Startups go through about three to four rounds of funding, depending on the industry — that is for those that make it through the rounds successfully. Because many startups fail early, many do not make it past the first round, Series A. 

For the startups that make it through Series C, they typically will then move forward to an IPO.

Other Funding Types

Startups do not have to solely rely on series funding to get their business up and running. There are many ways to gain capital for a business, from bootstrapping to crowdfunding to business loans. Aside from equity funding and funding from venture capital firms or angel investors, startups can get funding through:

• Bootstrapping: Founders may use personal funds, credit cards, or bartering.
• Crowdfunding: Founders can source funds from supporters, who may or may not get equity in return. Other perks for supporters may include early access or discounted prices to products or services.
• Loans: Founders may be eligible to apply for small-business loans at financial institutions.
• Grants: Startups may qualify for grants offered by governments or nonprofit organizations.

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