Small businesses are the lifeblood of economies but often lack the funds to scale, so many of them to seek external investment to realise their full potential. The UK is the third largest venture capital market in the world with UK companies raising £72bn between 2021 and 2023¹.

Funding rounds offer outside investors an opportunity to provide funding to a company in exchange for a desired return, such as an equity stake or partial control.

Series A, B, C and D funding refers to the different levels of external fundraising that a business may undertake as it sees to grow and expand. The stages come after the initial start-up investment such as pre-Seed funding, Seed funding or angel investment.

What is pre-Seed funding?

Pre-seed funding is the predecessor to Seed funding and is typically the investment sought by a business to test and validate its viability. This can include investment in research and development.

Pre-Seed funding often comes from more informal sources such as personal savings, friends and family as well as some angel investors.

What is Seed funding?

Seed funding refers to the initial and relatively small sums of investment sought by startup companies to help them in the early stages of their business development.

Like pre-Seed investors, Seed investors can still include friends and family but more typically they are made up of angel investors, incubators and accelerators and venture capital firms who are happy to take a risk on early-stage businesses.

What is Series A funding?

Series A funding is the first round of fundraising as the company seeks to establish itself following the initial seed or pre-seed finance.

Series A funding seeks to raise larger amounts of capital than Seed funding. The amount raised in series A is based on the valuation of the company and how that is expected to change over time.

In exchange for the risk they are taking in this early stage, investors often expect significant returns - either in equity or ownership.

Funding raised is typically used to invest in people, equipment and property or for research and development to refine the products or services.

What is Series B funding?

Series B funding seeks to raise further capital to scale the business now it is more firmly established.

This represents the next stage in a company’s growth and assumes that the business has moved beyond concept towards a proven business model.

Capital is generally raised to enable a business to capitalise on high growth potential and to expand its operations further. This could include new products and services or to fund expansion into new markets.

What is Series C Funding?

Series C funding is a significant step up from previous funding rounds and is often considered the third and final official venture capital fundraising before a company launches an Initial Public Offering (IPO) on the stock market.

At this stage, a business seeking Series C funding has demonstrated significant growth with potential for rapid expansion - be it through creating or acquiring new lines of business or by further optimising the existing business model as well as increasing headcount.

At this stage, investors may want to see evidence of a company’s potential for a future IPO, which only 3% of VC-backed companies reach².

What is Series D funding?

Series D funding is an additional stage that only a small proportion of companies will use. The company has already reached a certain level of maturity, and this fundraising is often to fulfil a specific purpose such as:

• Help a company prepare for an IPO that may lead to investors cashing in with a full or partial exit
• Funding an acquisition
• Invest in new opportunities for growth and late-stage expansion
• Address any gaps or unmet expectations from previous funding rounds
• Enhance processes, supply chain resilience and governance ahead of a public debut on the stock markets

Typically, few companies reach this point as it's more common for them to exit after Series C funding.

Unlike Seed funding, which typically comes from friends, family and known associates, Series A funding usually comes from more formal external sources such as more traditional venture capital, super angel investors and institutional investors.

Alternatives to these more traditional finance raising routes include:

Bootstrapping

Bootstrapping refers to funding a business with mostly internal means such as personal finances, savings and using revenue generated by the business. While it enables business owners to retain more equity and control while reducing debt, it can limit or slow growth.

Crowdfunding

Crowdfunding typically involves asking a large volume of people for small amounts of money – sometimes with very defined, very little or zero return expected. Crowdfunding is often performed via online platforms, which seek to raise the profile and potential customers of the business. It can be very appealing to businesses that may be unattractive to traditional financiers.

Venture debt

Venture Debt is a specialist loan provided to high growth, pre-profit early-stage companies that may already be backed by venture capital. They provide an additional buffer of liquidity between other types of equity financing rounds (e.g., A, B, C, D etc.).

Unlike more traditional loans, venture debt considers the equity raised by a business and its ability to raise further capital instead of cash flow. Interest rates are often higher than a traditional business loan given the additional risk associated with pre-profit businesses.

Angel investors

Angel investors are often high-net-worth individuals with successful business experience who are willing to invest their own money in early-stage businesses in exchange for a stake in the company or equity.

They may make a single payment or several and their level of hands-on involvement can vary.

It really depends on the sector and stage of funding versus the size and appetite of the investor or investment house.

Typically, you can expect:

• Series A funding usually comes from more traditional venture capital; however, it may also be funded by super angel investors and institutional investors
• Series B investors tend to be venture capitalists or private equity firms but like with Series A, funding can also include institutional investors
• Series C investors tend to be from large venture capital firms, private equity firms or hedge funds, but can also include corporate and institutional investors
• Series D investors tend to be from large venture capital firms, private equity firms, hedge funds, investment banks and financial institutions.

When it comes to finding investors, do your research, understand the difference between them and identify the ones that best suit your business and needs. Attend industry events and seek recommendations and introductions to learn more.

Consider speaking to an experienced professional for advice in advance of approaching investors so that you can maximise your chances for success.

Each round of funding (A, B, C, D) represents a separate fundraising opportunity (building on the last) and forms the next stage in a company’s growth.

The letters represent the stage of funding sought. They correspond to the growth, size and opportunity of the business seeking to expand.

The minimum and maximum level of funding sought increases (sometimes significantly) as a company grows and progresses through the funding stages.

In order to successfully raise funds, companies must share certain criteria (revenue, number of customers etc.) and provide robust business plans so investors can consider the viability, potential and expected returns of the business.

The process to consider:

• The timing of a fundraise - make sure you have enough cash reserves to operate until a fundraise is complete
• Be clear on the amount you are seeking to raise - be clear on what is a realistic figure to achieve your business goals
• What are you planning to use the funds for - have a clear sense of what you need funding to cover and how that will help grow your business
• Prepare your pitch - create a credible, realistic and attractive business plan that clearly demonstrates your thinking and the opportunity and return for potential investors

The benefits of funding depend on the business and need for capital but generally funding will enable a company to grow, expand or innovate in some way.

These are the benefits you’d expect to see by funding round:

Series A funding can benefit a company in the following ways:

• Enable a company to move from concept to a viable business
• Test, learn and refine the product or service offered
• Facilitate early growth and expansion via investment in people and property
• Connect business founders with experienced investors and business owners who can guide and advise on the next stages of growth

Series B funding can benefit a company in the following ways:

• Fund further opportunities to scale, grow and expand the business via new products and services, hiring new talent and entering new markets
• Fund innovation and product development
• Increase access to a wider, more experienced pool of investors to guide future growth
• Increase the valuation of the company and cement its market credibility

Series C funding can benefit a company in the following ways:

• Significantly increase external investor focus and attention on the business, raising the profile of its brand ahead
• Enable rapid and significant expansion, potentially even globally, to cement and enhance its business model
• Put the business in the strongest position to achieve a high valuation when it launches on a public stock market

Series D funding can benefit a company in the following ways:

• Capitalise on new opportunities, untapped potential, or gaps in business processes and operations
• Pay down debt to improve its financial position and stability and enhance valuation metrics
• Achieve considerable sales growth to raise its value ahead of a potential exit, maximising potential returns

While Series A to D funding can transform a company from being a start-up concept to a viable and profitable business, it comes with challenges, risks and downsides.

Factors to consider, include:

• Dilution of ownership: Investors will want a return on their investment, and this includes a significant equity stake in the business. So, returns generated on future exit or IPO are split between more people.
• Decrease in control: Founders become answerable and accountable to investors, who may have differing views about the pace and direction of expansion.
• Increased pressure: The business must demonstrate sufficient growth within prescribed timeframes, which can increase the emotional toll on founders and may encourage unsustainable growth strategies.
• Increased conflict: If founders and investors disagree on the purpose and vision of the business, it can cause relationship difficulties and take time and energy away from day-to-day business operations and opportunities.
• Slow process: The duration of a funding round depends on a number of variables, including market conditions, investor confidence, the amount of capital being sought and complexities around the business. Typically, Series A, B and C funding can take between 6-12 months. Series D (and beyond) can take 12 months or more, so it is important that businesses look to raise capital well in advance of requiring it.

As you can guess from the chronological naming of funding rounds, each time a company performs a fundraising, it is looking for a higher amount of investment.

To reflect this jump in the level of investment being sought, you’d expect the company to also have grown - in size, scale, operational costs and in its overall valuation.

Amounts vary, especially by industry but here is a rough idea of typical amounts being sought by funding round and expected company valuation:

• Series A funding typically seeks to raise between £1m to £15m.
• Series B funding typically seeks to raise between £10m and £50m. To raise this amount, a company’s valuation could range from £35 million to £1 billion.
• Series C funding typically seeks to raise between £15m to £100m. To raise this amount, a company’s valuation would tend to be at least £200 million and can potentially exceed £1 billion.
• Series D funding rounds are often substantial, seeking to raise more than £100m. To raise this amount, a company’s valuation has typically reached at least £1.4 billion.

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