The fundraising stages aren’t about dollar values—it’s about risk • Zoo House News
To get your rating up fast, think to yourself, “What is the highest risk right now, and how can I eliminate it?”
You’ve probably heard of Pre-Seed, Seed, Series A, Series B, and on and on. These labels are often not very helpful because they are not clearly defined – we’ve seen very small Series A rounds and huge pre-seed rounds. The defining characteristic of each round isn’t so much how much money is changing hands, but how much risk is involved in the enterprise.
Two dynamics play a role simultaneously in the journey of your startup. By thoroughly understanding them — and the connection between them — you can understand your fundraising journey much better and reflect on every part of your startup path as you evolve and evolve.
In general, the funding rounds are broadly as follows:
The 4 Fs: Founders, Friends, Family, Fools: This is the first money that pours into the company, usually just enough to prove some of the core technology or business dynamics. Here the company is trying to build an MVP. In these rounds you will often find angel investors with varying degrees of experience. Pre-Seed: Confusingly, this is often the same as above, except this is done by an institutional investor (i.e. a family office or VC firm that focuses on the earliest stages of businesses). This isn’t typically a “prize round” — the company doesn’t have a formal valuation, but the money raised is on a convertible bond or SAFE note. In this phase, companies usually do not generate any sales. Seed: These are typically institutional investors investing larger amounts of money in a company that has started to prove some of its momentum. The startup will have some aspects of its business up and running and may have some trial customers, a beta product, a concierge MVP, etc. It will not have a growth engine (in other words, it will not yet have a repeatable opportunity to acquire and retain customers). The company works on active product development and looks for product-market fit. Sometimes this round is priced (ie, investors negotiate a valuation of the company) or may be priceless. Series A: This is a company’s first “growth” lap. It will usually have a product on the market that provides value to customers and is on its way to becoming a reliable, predictable way to monetize customer acquisition. The company may be on the verge of entering new markets, expanding its product offering, or entering a new customer segment. A round of Series A is almost always “priced” and gives the company a formal rating. Series B and beyond: Series B is where a company usually gets serious. It has customers, revenue, and a stable product or two. From series B there are series C, D, E etc. The rounds and the company are getting bigger. The final rounds typically prepare a company to be in the black (be profitable), go public through an IPO, or both.
Each round, a company becomes more and more valuable, in part because it gets a more mature product and more revenue as it figures out its growth mechanisms and business model. The company is also developing in other respects: the risk is decreasing.
This last part is critical to how you think about your fundraising journey. Your risk doesn’t decrease as your business becomes more valuable. The company becomes more valuable as it reduces its risk. You can use this to your advantage by framing your fundraising rounds to explicitly make the most “scary” things in your business risk-free.
Let’s take a closer look at where risks arise in a startup and what you as a founder can do to eliminate as much risk as possible at every stage of your existence.
Where is the risk in your company?
Risk comes in many shapes and forms. If your company is in the idea phase, you can team up with a few co-founders who have an excellent fit for the startup market. You have determined that there is a problem in the market. Their initial interviews with potential clients all agree that this is a problem worth solving and that someone is – theoretically – willing to pay money to solve this problem. The first question is: is it even possible to solve this problem?