This post is part of the Entrepreneurial Education Series, which brings together successful, influential entrepreneurs and investors to teach entrepreneurs everything they need to know about early-stage investment through events, articles, videos, and more. If you are interested in learning more about raising a round, save the date for “Early Stage Investment 101” on June 17.
There are plenty of resources on fundraising for your startup — how to know if your business is ready to raise, where to get capital, and how to convince investors to provide that capital. But to really successfully fundraise, you should start by understanding the actual funding stages and how they build off of each other.
Here’s your official investor-approved cheat sheet:
Seed/Friends and Family
Think of a seed round as step one. It’s the first capital in, and it allows a startup to begin moving from an idea or prototype towards more fleshed out operations with the support of close friends and family. These are the riskiest investments, namely because there is likely no business yet. This is also usually the critical point in a startup’s life when it’s determining whether it’s actually more than an idea, and if it is a true business, if it’s an investable one.
Pre-Series A
The Pre-Series A stage is typically when a startup moves from a prototype to an actual product, seeking outside capital to help fund that first growth point. Venture capitalists and formal angel groups may begin to express interest and invest at this point, but it’s more likely that it will come from early-stage individual investors.
Pre-Series A deals are sometimes priced, but can also be bridge rounds.
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Bridge
In a bridge round, a company raises a convertible note in order to continue growing. Bridge rounds can be used between priced rounds. However, increasingly, bridge rounds have been used before priced rounds to help a company get to the next critical funding milestone. There is a risk associated with this approach because raising the note allows an entrepreneur to put off pricing the round, creating complications for him/her and the investors later on. Nevertheless, this kind of bridge has continued to be very popular, especially as a means of getting young startups to the difficult Series A stage.
Series A
At the Series A stage, companies usually have the product, customers, and some incoming revenues, but aren’t necessarily bringing in profits. They may need outside capital to keep pace with demand and their supercharged growth, or need an injection of capital to actually achieve significant growth.
The Series A round is priced, which means the bridge automatically converts. Institutional investors like venture capitalists, formal angel groups, and strategic partners are generally leading the round.
The key point to remember is that these investors aren’t injecting capital into the business simply because it needs it. If the company is failing and needs more money periodically just to stay afloat, then it stops looking like an attractive investment. Investors don’t want to write checks for an opportunity that isn’t capable of offering a return.
Series B & Beyond
A startup raises Series B, C, D and on (depending on the needs of the company) to expand market penetration after validating the market need in the previous rounds. Series B and later rounds are also institutionally led, though participants from earlier rounds may still play a part in the overall raise.
Key Takeway
Even at the very beginning of your raise, you should be preparing for subsequent rounds of financing. Keeping your eye on the fundraising trajectory will help you assess what milestones you need to achieve and focus on understanding your business’s capital needs over time.
About Hyde Park Angels
Hyde Park Angels is the largest and most active angel group in the Midwest. With a membership of over 100 successful entrepreneurs, executives, and venture capitalists, the organization prides itself on providing critical strategic expertise to entrepreneurs and the entrepreneurial community. By leveraging the members’ deep and broad knowledge of multiple industries and financial capital, Hyde Park Angels has driven multiple exits and invested millions of dollars in over 40 portfolio companies that have created over 850 jobs in the Midwest since 2006.
About the Authors
Alida Miranda-Wolff
Alida Miranda-Wolff is Associate Manager at Hyde Park Angels. Her role includes creating and executing marketing and communications strategies, planning and managing events, fostering and maintaining community and industry partnerships, and managing membership. Prior to joining Hyde Park Angels, Alida served as a manager, data analyst, and publication specialist at a multibillion dollar industrial supply corporation. She led one of the most successful Kickstarter campaigns in Chicago history and worked with half a dozen startups in various marketing, content creation, and project management roles. Alida believes in creating valuable, spreadable multimedia content, and has done so as a freelance writer for several print and online publications.
Pete Wilkins
Over the past two decades, Peter has successfully founded, built, and turned around companies in the education, healthcare, and technology industries. He has also leveraged his entrepreneurial experience to help build one of the largest and most successful angel investor groups in the country.
Peter currently leads Hyde Park Angels (HPA) as the managing director. Prior to HPA, he co-founded New Futuro, a socially innovative education company helping Latino families get their students into college. Before New Futuro, Peter worked with KKR Capstone (KKR’s operations group) as President of PRIMEDIA Healthcare, where he turned around the company from record losses to record profits and built one of the premier online physician education communities. Prior to PRIMEDIA, Peter successfully served in senior sales and marketing roles for two technology startups that collectively sold for more than $2.8 billion. Peter holds a degree in business from Indiana University and graduated from the University of Chicago Booth Executive Institute.
Peter is passionate about inspiring and developing current and future startup leaders. He believes when entrepreneurs lead with purpose as their best-selves they improve their lives, their companies, and the world in incredible ways. Peter serves on a number of company, venture capital and non-profit boards and is an active advisor to many entrepreneurs. He also frequently speaks about entrepreneurship, as well as providing tailored solutions to executives and companies through the Omaxen Group.
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