Summary of Private Investment Rounds

Once a company starts raising “real” capital, each round’s notation follows the last in alphabetical order — Series A, Series B, and so on. Sometimes a company will run out of money before they are “ready” to complete their next raise. In these cases, companies will attempt to raise a “Bridge” round. Often the bridge round is a convertible note, but in some cases it is an extension of the previous Series. This all depends on investor appetite. If a company is raising capital as an extension of a previous round, we will see notation such as Series A-2 (or similar).

As an investor the most important thing is to not put an opportunity into a “box”. Drop your preconceived notions and evaluation what is in front of you. Companies that break the mold are often the most successful.

Private Funding Round Overview

• Friends and Family Round (sometimes called pre-seed)

  • Companies are typically pre-revenue, often pre-product. This is when founders reach out to their closest network and say: “I just started my own company to do XYZ, I’d love to have you as an investor”, and try to get $150k from their Uncle.

  • These rounds are typically small dollars, raising maybe $1-3mm in $50-250k slugs

  • Target Investors: Friends & Family, Angel Investors, VCs may participate if it is a founder that has a strong entrepreneurial history

• Seed Round

  • Companies may be pre-revenue, but should at least have an MVP (minimum viable product) or prototype that can be brought to market. As an investor at this stage, we love to see distribution partners on tap, POs, or other indications that revenue is on the way.

  • These rounds can be up to ~$5mm-10mm, it all depends on the TAM, estimated likelihood of success, and how close the company is to generating revenue. In recent years, we have seen companies that are in highly sought after sectors (like AI is now) raise quite large seed rounds.

  • Target Investors: Angel Investors and Venture Capital Funds

• Series A-B

  • Companies should be generating revenue with 5-10 paying customers that are willing to evangelize the product. This helps investors underwrite product-market fit, which is the degree to which a product satisfies a strong market demand. Customers are paying for a service/product and saying good things about said product/service after using it - check, check.

  • This is often where a strategic investor (discussed after pre-IPO round) can be most helpful in driving the next round of product uptake. Strategic investors typically have high-value connections whose uptake could be worth 5-10 smaller customers. A true strategic should be able to make a warm introduction and set up a relationship that will provide feedback to improve the product/service in addition to driving chunky revenue.

  • The size of these rounds is highly variable and correlated, again, with the TAM of the opportunity and the cash “burn rate” of the business. Typically companies like to raise 18-24 months of capital to give executives adequate time to execute.

  • Target Investors: Venture Capital and Early Stage Growth Funds

• Series C and later

  • Companies should be showing strong product-market fit and “traction”, in other words we are looking for an increasing number of paying customers and increasing annual revenue per customer.

  • Towards Series D and E (or later) we will be looking for our companies to exhibit “operating leverage”, which basically means the variable cost base is not growing dollar for dollar with the topline (revenue). In Finance speak: operating leverage is the extent to which each dollar of topline contributes to the expansion of EBIT (and thereby the expansion of EBIT Margin).

  • The size of these rounds will again be correlated with the size of the business and the TAM of the opportunity. Different business models and sectors may require more or less time to scale topline. The key is that both PMF and traction exist.

  • Later in this stage, investors are likely to encounter companies that are not performing as well as anticipated, for a variety of reasons. Translating public markets maxims, this is where investors should “cut losses quick”, “let your winners ride”, and “never average a loser”. Remember that 70% of businesses will fail within a decade.

  • Target Investors: Venture Capital, Early Stage Growth, Late Stage Growth, Family Offices

• Pre-IPO Round

  • The capital markets have expanded in the last 10+ years, arguably driven by zero interest rate policy influencing yield-seeking behavior which moves investors out on the risk curve. As such, the private markets are much deeper than they were when venture capital first came about, and it follows that deeper private markets can support larger companies. Therefore, we see companies staying private much longer - see Facebook as a great example.

  • The hurdle rate for pre-IPO investors is typically much lower, but in return they are offered (very) short term liquidity. There are often penalties (sometimes severe) if a company does not make it to the public markets within a defined period of time.

  • Whereas VCs and early stage growth investors are looking for 10x, 100x, or 1,000x return, investors in a pre-IPO round typically get at a ~20% discount to the “IPO pricing” (public markets participants may point out that the stock’s first trade may be well above or below the “IPO pricing” based on market conditions).

  • Target Investors: Late Stage Growth, Hedge Funds, Family Offices

Note that many times early-stage investors (F&F, Seed, ~Series A-C) may negotiate “pro-rata rights”, which means that investor has the right to invest in future rounds up to their existing ownership percentage to avoid dilution. In these cases, you may see Angel Investors and Venture Capital firms moving “up market” and participating in later stage financings, such as the Series D or Pre-IPO round.

From the founder’s perspective, there are basically two “types” of capital providers. There are “financial” investors and there are “strategic” investors. Financial investors are those that are prioritizing the financial return to their LPs. These investors are more likely to be focused on valuation and structuring. Strategic investors are those that provide their founders with something in addition to capital — that may be industry specific biz dev, opportunity specific operating experience, or simply relationships that the founder can capitalize on. Strategic investors are “company builders” who can be supportive in the darkest hours. Strategic investors typically “charge more” for their capital since these investors know they are bringing something extra to the table. Financial and strategic investors exist in each of the categories mentioned above, of which there are many left unmentioned.