Recent years have seen significant changes in the venture capital landscape. Venture capital activity is not at the levels seen in 2021, and startup founders are finding it more challenging to raise capital in an increasingly competitive funding environment. 

Understanding the different stages of venture capital is an important part of fundraising strategy. It helps founders target investors who specialize at a specific stage, and it helps founders plan their fundraising journey and set realistic expectations and milestones. In turn, founders can create a more competitive strategy to fund their growth. 

The Players: Who Are Your Investors?

Depending on the startup funding round you’re in, your investors may be family or friends, or they could be larger institutional investors. 

  • Venture capitalists: These institutional investors are vetted and can provide money and business expertise to early-stage startups. Venture capitalists (VCs) can also offer significant industry experience.
  • Angel investors: Angels are high-net-worth individuals who invest in seed-stage startups in exchange for equity in the company. Their investment amounts are usually smaller than those of venture capitalists, but they offer shorter closing times and don’t interfere in day-to-day operations.
  • Startup accelerators: These firms offer select startups a set funding amount in exchange for equity in the company. In addition to funding, accelerators offer founders access to valuable networking opportunities, industry knowledge and peer support. 
  • Private equity investors: These institutional investors focus on established companies looking to grow or restructure. PE investments may take the form of growth equity investments or buyouts.
  • Hedge funds: A limited partnership of private investors seek investment opportunities that earn higher than average returns. Hedge fund investments often help businesses advance to their IPO.

At every stage in the fundraising process, it’s essential to do your due diligence on potential investors so you can find the right fit for your industry and your company’s values. 

The Stages of Venture Capital Indicate Evolving Levels of Risk

Jeffrey F., a fractional CFO and former venture capitalist, notes that there are three main stages of VC funding: before series A, series A and after series A. At each stage, investors are assessing risk and the startup’s sustainability. “Most startups fail within the first year, “ says Jeffrey. “As startups grow, however, they eliminate different types of risks over time. Funding rounds are tied to milestones that show a risk category is no longer relevant.” Because each new fundraising stage signals a different level of risk for investors, reaching these milestones can impact your goals as a founder. 

Funding sources and amounts of funding available are also dependent on company valuation. Establishing a valuation for your startup can be challenging, especially in the early stages when your company isn’t yet generating income. It may be helpful to look for a comparable startup that’s in a similar sector or has a similar market size to yours.

The Pre-Seed Stage 

The earliest VC funding stage is the pre-seed stage. At this stage, investors look for: 

  • A strong business concept
  • An idea of product-market fit
  • Progress toward patents or copyrights
  • Partnerships that could help the startup grow

Pre-seed investment is most likely to come from founders themselves, from family or friends or from micro-venture or early-stage VC funds that are aimed at businesses in the earliest stages of development. 

Company valuation at the pre-seed stage depends on how close the business is to generating revenue. Investors typically value a company with an innovative idea lower than a company with an innovative idea and a strong founding team. Valuations at the pre-seed stage range from less than $1 million to as much as $10 million, and funding often ranges from $100,000 to $1 million. 

The Seed Stage

During the seed stage, founders work toward getting their business operational, creating a tangible product or prototype and gaining some initial traction. 

Jeffrey explains why seed financing is the riskiest type of VC investment. “Everything before series A is considered more risky, and financial projections matter less because they’re not yet reliable enough. A seed round used to be the first formal funding round for startups with traction but without reliable revenue. With tightening market conditions, seed companies are now typically required to show some proof of revenue.”

At this stage, funding is likely to come from early-stage venture capitalists and angel investors. Company valuations at the seed stage average $15 million, while funding averages under $5 million.

As your business progresses through the VC funding stages, it’s essential to have a capitalization table or cap table that accurately records equity ownership. Especially for early-stage startups, tracking ownership of different types of shares and what those shares are worth is essential. At the seed and subsequent stages, founders will often give up 20% of their equity ownership to investors, so it’s important to have a strategy for managing dilution at each stage of venture capital. 

The Series A

In the series A stage, a startup has shown some traction in building its market. At this point, founders have a number of goals, including: 

  • Driving customer growth
  • Refining their product or service
  • Preparing to scale operations
  • Building advertising and marketing
  • Growing revenue

In a series A, funding will come from VCs with a focus on early-stage startups. These investors will play an active role in the company and its board to provide guidance and oversight. 

At this stage of venture capital, the average valuation is typically under $50 million. Valuation is highly dependent on financial performance, growth potential and the company’s competitive advantage in the face of industry trends. In 2023, median series A funding in the U.S. was $12 million. 

The Series B

In the series B stage, VCs want to see a company that can demonstrate solid customer growth. In addition, series B companies are often prepared to scale up and accelerate their marketing and sales efforts. “Series B and subsequent fundraising rounds are all about accelerating growth,” says Jeffrey. 

Company valuations at this stage often average $100 million. Similar to series A, valuation depends on financial performance and revenue growth. Market share and possible exit opportunities will also affect the valuation. In 2023, median series B funding in the U.S. was $28 million.

The Series C – a.k.a. the Expansion Stage

When your business is in the series C stage, it’s ready to fuel more aggressive growth initiatives. Your startup is well established with stable revenues and market share that meets target expectations. In addition to late-stage venture capitalists, funding sources may include hedge funds, banks and private equity firms. Valuations at this stage often exceed $100 or $200 million, and in 2023, median series C funding in the U.S. was $42 million.

Jeffrey explains what fundraising looks like for mature startups. “Startups need to show that they have a sound strategy to capitalize on a promising growth opportunity without endangering their core business. Some examples include geographic expansion, launching a new product line, scaling a tested marketing strategy or a strategic acquisition.”

The Mezzanine Stage 

At the mezzanine stage, your company is closing the gap between the last stage of funding and an exit. At this stage, some companies are acquired by another company, some remain private by using venture capital investment to grow, and some use funds to finance the steps involved with an IPO. Most funding at this stage comes from private equity firms and hedge funds. 

Exiting the Venture Capital Stage With an IPO

For many founders, the ultimate goal is to make an IPO and sell the company’s shares on the open market. For mature and stable companies with revenue that can attract interest from public investors, this is an excellent way to generate funds and reward the investors who have helped the company succeed. This process takes time: U.S. companies average 5.1 years between first receiving VC funding to achieving an exit. But as Jeffrey points out, making it to an IPO is far from certain. 

Build Your Fundraising Roadmap

Paro’s strategic advisory and startup consulting services can help you better achieve your fundraising goals and devise a strategy that makes sense for your business stage. Whether you’re planning for your first capital raise or preparing for your next round of funding, our vetted, fractional experts offer qualified financial leadership to help your business seize its most significant opportunities. Schedule a consultation to be matched with a fundraising expert.