Investment series

VC funding of startup companies comes in rounds, commonly referred to as Angel, Serie A, Serie B, Serie C, etc.  What does that mean and why does it come in rounds? That’s what this post is about.

Bruno and Tyebjee  have identified six rounds of capital infusions in their article The entrepreneur’s search for capital (1985) :

  1. The seed money stage: angel investment mostly to proof a concept and to cover initial product development and marketing costs;
  2. First round financing: to fund commercial manufacturing and sales;
  3. Second round financing: to provide working capital for a growing firm with expanding sales; the company is not yet profitable;
  4. Third round financing: for companies that break even or show a profit. The investment is required to fund working capital, marketing and/or product development.
  5. Fourth round financing: the company is expecting to have an IPO within six months to a year. The investment is often used to restructure major stock holder positions facing the IPO and repaid after the public underwriting.

Although not mentioned by Bruno and Tyebjee, they define their rounds by milestones, i.e. the state a company has reached. Looking at the milestones there is a difference in characteristics between the first and second round: the second round the investors are funding the scalability of the company itself instead of financing the product development or its marketing. An important indication is the provisioning of working capital to finance existing activities.

With this shift from product to the business, the company has reached the milestone that it has value added to the market with the product and the next milestone is defined in terms of growth of turnover.

Most commonly terms used in the VC industry however are Angel, series A, Series B, Series C etc.  to indicate the round of financing of a company. Although commonly used the terms are not defined exactly. In this thesis a Series B investment will be used as an equivalent for the Second round financing as defined by Bruno and Tyebjee.

The Series B investment can be spread in tranches where the VC and the startup company agree upon certain predefined milestones as described by Metrick and Yasuda in their book Venture capital and the finance of innovation ( 2011, p. 148).  I will use the term minor milestone to indicate the proceedings of the funding within an investment Serie using tranches and the term milestone to indicate a new investment Serie.

Another nice post about this can be read here: Elad Blog funding rounds