From Seed to Glory: Investment rounds for start-ups explained

How should you position your business for the successive rounds of funding – and what are investors actually looking for in their negotiations with you?

Let’s take a look at some of the most common investment rounds for the start-up sector, summarise their function and explain the sorts of businesses that investors are looking to invest in.

Seed investment

  • Typical raise: £10,000 – £250,000
  • Investors will expect: 5% – 10% equity
  • Post money valuation: £100,000 – £1,000,000

 

In this preliminary investment stage investors are looking to help you establish the direction and goals of your business.

As the seed stage of any organisation is embryonic, at this stage investment is necessarily speculative.

You will be seeking help with establishing your start-up as a going concern and proving your concept (often by going as far as bringing a product to market).

Seed investment is not always necessary as many entrepreneurs already have most of their infrastructure in place before seeking capital.

This is also the stage where founders should be prepared to give up shareholding for relatively small amounts of capital.

 

To secure seed investment you need to position yourself as needing funding for:

Finalising your product

You can demonstrate a clear need for a type of product or service – and may even have expressions of serious interest and IP/patents already in place. Your funding will cement design elements and clarify your service offerings ready for launch.

Orienting yourself in the market

With a clear market opportunity identified your funding may be used to carry out research into the best entry route or into establishing a competitive advantage to lead with.  It should also cover the production of an initial suite of marketing material.

Creating your team

If your start-up is at the stage where the lack of a team is preventing its growth and development, many investors are happy to offer seed investment that will help you create the right mix of expertise to create or launch your concept.

Launching your Product or Service

If you can confidently express how your seed capital raise will translate directly into a successfully launched product or service then you are in a strong position to succeed at this stage.

Series A investment

  • Typical raise: £250,000 – £2,000,000
  • Investors will expect: 10% – 30% equity
  • Post money valuation: £750,000 – £10,000,000

 

At the point of seeking Series A funding you need a strong, defined idea of what the central goal is behind your product or service.

You may well have already launched commercially.

You may have sporadic (or even steady) revenues, although you are probably unprofitable at this stage.

You have identified the early barriers to accelerating your market entry and require funding to refine and scale the business.

 

To secure Series A investment, you need to position yourself as needing funding for:

 

Economies of Scale

You will have ideas of ways you can optimise the promotion and delivery of your products and services and express how you intend to gain efficiencies through the development of a larger customer base.

Your goal here is to demonstrate how you could lower costs and increase sales with funding.

New Markets

With an established and replicable success in one market you may be ready to enter similar markets. The funding you seek will allow you to do this.

Your injection of capital may open up new geographic or demographic markets and help you start to build a bigger brand.

Reaching the next stage

The primary function of Series A investment is to take start-ups to the next level.

You need to position your business as having very clear and structured steps that will produced defined business goals. Those goals should map clearly to a significant appreciation in market capitalisation and share value and should be accompanied by a clear exit strategy for your investors.

Shortfalls

It may be that you are seeking Series A investment to make up for a shortfall in capital. Many start-ups remain promising investment opportunities even if unforeseen expenses have depleted available funds, and they require another round of investment to offset this.

In situations where lack of cash flow has driven a company to seek funding it can often feel like investors have the upper hand, quite simply – they do.  Always seek funding well before things get desperate.

Series B investment

  • Typical raise: £5,000,000 – £20,000,000
  • Investors will expect: 10% – 30% equity
  • Post money valuation: £15,000,000 – £100,000,000

 

To secure Series B investment, you will already be an established business or, at least, be well on the way toward that. Your production and processes will be well managed, your marketing cost-effective and you’ll have a growing customer or user base.

Investors at Series B are mainly concerned with scalability and immediately attainable growth potential.

 

To secure Series B investment, you need to position yourself as needing funding for:

 

Talent and team expansion

To achieve continued growth the recruiting of employees may involve an initial outlay beyond using sales to pay for salaries, equipment and office space.
Globalisation

Your start-up may have explored a couple of overseas markets following Series A, but this is now the stage where capital is needed to establish yourself more securely on the global stage.
Acquisitions

With your initial business growing sustainably, you can seek Series B investment to rapidly grow through acquiring or merging with another business. This could be a competitor’s business, a business that complements and expands your existing activities or a business that has assets or IP that could help you develop.

Series C investment (and beyond)

  • Typical raise: £-unlimited
  • Investors will expect: 10% – 30% equity
  • Post money valuation: £-unlimited

 

Theoretically there isn’t a technical limit to the number of investment rounds your start-up can enter.

Usually, though, anti-dilution agreements kick in soon after Series C and, because more and more equity from your company is released with each round, things tend to stop here.

But you’ve come a long way from bootstrapping.

Your seed has grown into a mighty acorn.

And every now and then… from a mighty acorn hatches a unicorn.