Funding round – what is it and what are its types?

The process of finding investors for a start-up or growing company is quite complex and most often involves several stages. One of its key elements, however, is the funding round, during which a company (most often a startup) raises the capital necessary for its creation or growth.

In this article you will learn:

• What is a funding round?
• What are the main types of funding rounds?
• What does a funding round look like at the pre-seed stage?
• What does a funding round look like at the seed stage?
• What factors do investors consider before providing capital?

Funding round – definition

Funding rounds are a very important stage in the life of a company – especially in terms of its growth. They enable startups and growing companies to raise the funds they need to conduct market research, conduct marketing activities or expand their business in a broad sense.

A funding round is one of the stages in a company’s life cycle during which external investors provide capital to a start-up or growing company in exchange for shares or other forms of compensation.

Definition of a funding round

Although usually the capital offered by investors means strictly financial resources, companies may also receive other forms of support, such as professional advice or access to specific resources.

Main types of financing rounds

The financing stage of an investment is closely linked to the development phase of the company. When a venture is in its early stages, investors often focus on risk reduction, providing funding that allows the idea to develop further. This usually includes initial capital support to enable research and development of the product or service and initial market testing. During this phase, investors often look for significant indicators of progress, such as a prototype, potential market interest or data to confirm the potential of the venture.

We can distinguish between 3 funding rounds:

• Funding round A – this is the first significant funding round for a startup. It usually demonstrates proof of concept and aims to develop the product and increase market presence. Funding round A is supported by venture capitalists who specialise in supporting young companies.
• Funding Round B – is the next stage, building on the progress made in Series A. Here, startups already have a proven business model and customer base. Investors, including venture capital and private equity, focus on growth through investment in sales, marketing, product and team development.
• Series C funding round – this stage focuses on scaling the business. Organizations that have reached Series C have a proven company business model, a large market share and generate significant revenues. Late-stage private equity investors and even public market investors, support growth in new markets, expansion of product offerings and operational efficiencies.

A funding round at the pre-seed stage

Pre-seed is actually a very early stage of a project. However, this does not mean that you cannot seek investors now. The investment round at the pre-seed stage is most often done by trusted people – relatives, family, friends. Business angels, who often take on funding at this early stage of growing a startup, can also be helpful.

Remember that pre-seed is a stage of very early project development, usually at the very beginning, when the idea needs to be explored and its potential verified. At this stage, venture capital funds are less likely to get directly involved. That is why, at this stage, the providers of capital are specialised Seed Capital funds.

Seed capital funds are oriented towards investing in the early stages of venture development. They specialise in supporting projects at a stage that is too early for most VC investors. They are the ones that typically cover the pre-seed phase, providing financial support, but also knowledge, contacts and experience that are extremely valuable at the beginning of a startup’s development.

Seed capital funds are the bridge between the pre-seed and seed stages. In this way, they help startups to transform ideas into more detailed business concepts. They enable companies to carry out initial research, develop prototypes, start building a team and prepare for the stage when they are ready to invest with a larger scale.

Seed stage funding round

At the seed, or seed stage, capital is most often raised from Venture Capital funds, incubators, angels or business accelerators. This is definitely an easier stage than pre-seed, or pre-seed. When does one have a seed investment round? Primarily when:

• the startup can present a business plan detailing,
• the assumptions of the business model in terms of generating interest in the market have been confirmed by the company’s potential customers.

Factors that investors consider before providing capital

If your startup wants to raise funding, you have a lot of work ahead of you. Not only do you have to do market validation or choose a strategy for your startup. You have to match the expectations of investors and present yourself from your best side. Investors will pay attention to your startup before they become convinced and want to support your next investment round:

• originality and ingenuity,
• a refined business model,
• the business plan – preferably based on research, figures and statistics,
• the competence of the project team,
• funding tranches dependent on KPIs.