Fundraising stages aren’t about dollar value – it’s about risk

For a rapid rise in valuation, think, ‘What is the biggest risk right now and how do I remove it?’

You’ve probably heard it before pre-seeds, seeds, A-series, B-series and so on and so forth. These labels are often not very helpful because they are not clearly defined – we have seen very small A-series circles and huge pre-seed circles. The defining characteristic of each round is not so much how much money changes hands, but how much risk there is in the company.

On the path of your startup, there are two dynamics at play at the same time. By having a deep understanding of them—and the connection between them—you’ll be able to understand much more about your fundraising journey and how to think about each part of your startup journey as you evolve and develop.

In the general round of financing, they take place as follows:

  • 4 F: Founders, Friends, Family, Fools: This is the first money that goes into a company, usually just enough to start proving some underlying technological or business dynamics. This is where the company tries to build an MVP. In these circles, you will often find angel investors of varying degrees of sophistication.
  • Previous seed: Confusingly, this is often the same as above, except done by an institutional investor (ie a family office or venture capital firm that focuses on the earliest stages of companies). Usually it is not a “price round” – the company has no official valuation, but the money raised is in convertible or SAFE notes. At this stage, businesses are usually not yet generating revenue.
  • seed: These are usually institutional investors who invest large amounts of money in a company that has begun to demonstrate its dynamism. A startup will establish some aspects of its business and may have a few test customers, a beta product, an MVP admin, etc. It won’t have a growth engine (in other words, it won’t yet have a repeatable way to attract and retain customers). The company strives for active product development and searches for the appropriateness of the product to the market. Sometimes in this round there is a fixed price (i.e. investors are negotiating the valuation of the company) or there is no fixed price.
  • Serie A: This is the company’s first “round of growth”. It usually has a product on the market that brings value to customers and is on its way to a reliable and predictable way to invest money in customer acquisition. The company may be entering new markets, expanding its product offering, or targeting a new customer segment. A Series A is almost always a “price” which gives the company an official valuation.
  • Series B and beyond: In Series B, the company usually goes to the races in earnest. It has customers, revenue and a stable product or two. From series B onwards you have series C, D, E, etc. Circles and society are getting bigger. Final rounds typically prepare a company to go black (to become profitable), go public through an IPO, or both.

In each round, the company becomes more and more valuable, in part because it gets a more mature product and more revenue as it figures out its growth mechanics and business model. Along this path, the company also develops in another way: the risk is reduced.

This last part is critical to your thinking about your fundraising journey. Your risk does not decrease as your business becomes more valuable. A company becomes more valuable when it reduces risk. You can use this to your advantage by designing your fundraising rounds to specifically reduce the risk of the “scariest” things happening in your business.

Let’s take a closer look at where risk occurs in a startup and what you can do as a founder to remove as much risk as possible at every stage of your company’s existence.

Where is the risk in your company?

Risk comes in many shapes and forms. When your company is at the idea stage, you can meet some co-founders who are a perfect match for the founder market. You have identified that there is a problem in the market. All of your initial interviews with potential customers agree that this is a problem worth solving and that someone is—in theory—willing to pay money to solve this problem. The first question is: can this problem be solved at all?

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