To grow in value quickly, think, ‘What is the highest risk right now and how can I eliminate it?’
You may have heard of pre-seed, seed, Series A, Series B, etc. These labels are often not very useful because they are not well-defined — we have seen very small Series A rounds and huge pre-seed rounds. . The defining characteristic of each round is not how much money is in hand, but the degree of risk in the company.
On your entrepreneurial journey, there are two dynamics at play. By getting a deep understanding of them — and the connections between them — you’ll be able to better understand your fundraising journey and how to think about each part of the startup path as you grow and develop.
Generally speaking, in broad terms, funding rounds tend to go something like this:
- The 4 Fs: Founder, Friends, Family, Fools: This is the first money that goes into the company, usually just enough to start demonstrating some core technology or business dynamics. Here, the company is trying build an MVP. In these rounds, you will often find angel investors of varying degrees of sophistication.
- previous seed: Confusingly, this is often the same as the above, except done by an institutional investor (i.e. a family office or VC firm focused on the early stages of a company). This is not usually a “valuation round” — the company has no formal valuation, but the money raised is on a convertible bond or SAFE. At this stage, companies usually have not yet generated revenue.
- Seeds: These are typically institutional investors investing larger amounts of money in a company that has already begun to demonstrate some of its momentum. The startup will have some aspect of its business and may have some test clients, beta products, concierge MVPs, etc. The company will have no growth engine (in words) Otherwise, the company will have no incentive to grow in terms of how to attract and retain customers). The company is actively developing products and finding suitable products for the market. Sometimes the round is valued (i.e., investors negotiate a company valuation), or it may not be valued.
- Series A: This is the first “growth round” a company has raised. It will often have a product on the market that delivers value to customers and is well on its way to achieving a reliable, predictable way of pouring money into customer acquisition. The company may be about to enter a new market, expand its product offering, or pursue a new customer segment. A Series A round is almost always “valued,” giving the company an official valuation.
- Series B and more: At Series B, a company usually takes the race seriously. It has steady customers, revenue, and a product or two. From Series B on, you have Series C, D, E, etc. The rings and companies are getting bigger and bigger. The final rounds often prepare a company to go black (profitable), go public through an IPO, or both.
For each round, a company becomes more and more valuable in part because it is getting an increasingly mature product and more revenue as it figures out its growth engine and business model. . Along the way, the company also grows in another way: Risks go down.
That last part is important in how you think about your fundraising journey. Your risk does not decrease as your company becomes more valuable. The company becomes more valuable because it reduces risk. You can use this to your advantage by designing fundraising rounds to explicitly reduce the risk of the “frightest” things about your company.
Let’s take a closer look at where risk emerges in a startup and what you can do as a founder to eliminate as much risk as possible at each stage of your company’s existence. .
What are the risks in your company?
Risk comes in many shapes and forms. When your company is in the concept stage, you can match up with a number of co-founders who have excellent founder-match markets. You have determined that there is a problem in the market. All of your initial prospect interviews agree that this is a problem worth solving and that someone is — in theory — willing to pay to solve it. The first question is: Is it possible to solve this problem?
