What You Need for Each of the Funding Rounds
Written by Amanda Bower | Published: August 10, 2023
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To succeed in today’s competitive market, you must have a strong team, cutting-edge technology, a bold vision for the future, and a well-crafted plan. But without sufficient funding, your progress will be limited. Funding rounds can be a vital part of a company’s growth and success.
As a startup leader, you have ambitious goals for your company. To reach them, you’ll need to go through different funding rounds that provide the capital you need to fuel your operations, scale your products or services, launch innovative ideas, break into new markets, and take your business to new heights.
To win over investors at each stage, your business’s accounting plays a critical role. This guide will give you everything you need to know about raising capital in each funding round.
Reminder: The “Promise” of Funding Starts With Accurate Accounting
Before we dive into exactly how individual funding rounds work and what you need for each one, it’s important to remember that to secure funding from investors, your business needs to have strong accounting practices in place.
You might have the best startup idea the world has seen, but if your accounting is a mess, you will be hard-pressed to navigate the funding rounds and win over investors with deep pockets and powerful connections.
Why is that the case? There are several critical ways accounting plays a role in a business’s ability to progress through different funding rounds successfully.
When a company goes through a funding round, potential investors will only invest if they are confident in the business. Before investing, they will need to have a clear understanding of the company’s financial health and future prospects. This requires accurate accounting, including bookkeeping, financial analysis, and projections.
Another way accounting plays a role in funding rounds is through the valuation of a company. Businesses undergo a valuation before each funding round (where the company’s worth is assessed), which impacts the kind and amount of funding a business receives.
The valuation of a company is based on many things, including a business’s assets and liabilities. To ensure accurate valuation, a business’s accounting needs to be in excellent shape. Accounting practices like excellent bookkeeping, watertight business taxes, accurate financial reporting, and comprehensive cash management are just a few that come into play.
Seed Round / Angel Round
Before a startup goes through the funding rounds, they typically use “pre-seed” funds to get things started. For example, pre-seed funding can come from founders, friends, and family. After that, series funding formally begins.
Seed funding is the first of the main series of funding rounds, and it’s usually the first form of substantial, external funding that a startup receives to accelerate its growth. This and subsequent rounds are all equity funding rounds (or investment financing), where investors receive shares or a stake in the company they are investing in.
Startups raise an average of $1.5 million in a seed round, but this number can vary greatly. Seed funding often comes from some investors of similar profiles as pre-seed funding (such as friends and family). It can also come from angel investors (high-net-worth individuals who invest in early-stage startups), venture capital firms, and crowdfunding.
Startups looking to secure seed funding must prove to potential investors that their idea has market value and traction among users. Validation through user engagement, customer acquisition, or revenue growth are all important to investors. Demonstrating good bookkeeping practices and providing financial reports can help showcase these successes.
Many startups receive the funds they need during seed funding stages and never progress to other rounds. Generally, companies raise an average of $5.6 million in seed funding before moving on to Series A.
Series A funding is next, and a business usually has to demonstrate that it has a viable pathway to long-term, sustainable profits by this stage. The jump in requirements from seed funding to Series A funding can be fairly substantial—that’s likely why less than 10% of startups that raise a seed round successfully execute a Series A funding round.
Venture capital firms and angel investors tend to spearhead Series A funding. But because of the challenges of generating interest in heavy-hitter investors in Series A funding, many businesses also use equity crowdfunding at this stage.
One of the biggest factors influencing investors during Series A funding is traction—investors want to see the explosive growth potential of your company. They want to see how scalable it is, what your future visions are, and how strong your strategy is.
When seeking Series A funding, it’s important to have precise financial projections, strong KPIs, and a solid understanding of your business’s economics. Demonstrating business profitability through excellent accounting is essential, as the median pre-money valuation for Series A startups is around $50 million.
Series B funding is focused on expansion, scaling operations, and preparing for big-picture future milestones (such as launching an initial public offering or IPO). At this stage, a startup should have a tried-and-true proven business model, a consistently expanding customer base, and a clear path to profitability.
The main focus of Series B funding is to scale the business, and the funds are typically used for development, geographic expansion, marketing efforts, and securing additional distribution, for example.
During Series B funding, VC firms usually take the lead and carefully examine your business metrics to assess its growth potential. These metrics may include churn, growth, and customer lifetime value. For this, strong bookkeeping practices will come in handy, as will your financial reporting (including your monthly financial analysis). In addition, these foundational metrics will be used to develop the future forecast that entices investors to take the next step.
Series C funding is for businesses that are already well-established and successful but need the funds to help them expand, sometimes through acquiring other companies. It also can be used to prepare a company for an IPO. During this round of funding, investors might include private equity firms, hedge funds, and investment banks, for example.
Series C funding is fairly advanced: companies at this stage are usually valued at about $118 million, and the average funding amount for a Series C round is $59 million. Because of this, investors will want to see rock-solid accounting and financials that prove a company’s strength and ability to dominate markets, merge or acquire companies, and expand and grow.
Increase Your Chances of Receiving Funding By Having Proper Accounting From the Start
Having great ideas is not enough to succeed in business without proper funding. To excel in each funding round, your accounting practices must be top-notch. Investors trust and invest in companies with financial and accounting records that reflect their potential for greatness.
If you want to strengthen your accounting practices and be prepared for your next funding round, we are here to help. We offer bookkeeping, finance, tax, HR, and payroll services for startups, influencers, streamers, and growing businesses.
Our services can give you the back-end accounting work you need to win over your next big investor and get the capital you need to take your business to the next level. Contact us today to get started.
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