Startup Investments: Investment Rounds Explained


Investment rounds are an essential part of the startup investment journey. If you are a new investor in the startup marketplace, then you will need to quickly familiarize yourself with each round. You will encounter them progressively as you negotiate a deal either with a startup founder, or as an investor looking to attract further capital to an existing organization. Either way, an understanding of each round or why it exists is critical.

The terminology used to describe these investment rounds can seem daunting, but it need not be. A big part of this is, understanding the various rounds of investment out there so that they may be negotiated with ease and confidence.

With this in mind, let's take a look at some of the most common investment rounds seen in the startup sector, summarizing their function and why they're important.

Sowing the seed: Seed Funding

You can think of a seed capital like an analogy for planting a seed for a tree. This is the first type of investment round on offer through a startup. It is a preliminary investment stage which is geared towards helping a startup founder, establish the direction and goals of their business. The seed stage of any organization is clearly embryonic and is therefore more speculative than other rounds of investment. It is there to establish the startup as a going concern, in many cases going as far as to bring a product to market.

The key players in this round are more often the risk –loving type. Usually, angel investors and early stage venture capital firms dabble in this less formal round of funding. A seed investment should aim to achieve Product Identification, Demographic Targeting, Marketplace orientation and Team creation.

Optimizing: Series-A Investment

Series-A funding is useful in optimizing the product and user base. This type of investment is often first encountered when the seed stage does not require outside funding. At this juncture most startups have a strong defined idea of what the central goal is behind any product or service and may even have launched them commercially.

The investors involved in the series-A round come from more traditional venture capital firms. Well- known venture capital firms that participate in series-A funding are Sequoia, Benchmark, Greylock, Accel, etc. Angel investors also invest but tend to have much less influence in this funding round.

Build: Series-B Investment

By the time, series-B investment is being actively pursued, a startup is usually well on its way to being a truly established business. Production is well managed, advertising is in full flow, and the customers or users are actively purchasing an associated product or service as planned. While scalability is a factor in series-B investment, here it is the main focus. This includes:

Team Expansion: More employees are likely to be required as the companies grow.

Globalization: Trading in every region can require a significant outlay depending on the nature of the business, and this is exactly why series-B investment rounds exist.

Acquisitions: Rather than using its own reserves it can be beneficial to pursue new investment to fund such an acquisition or merger.