Why Series A and Series B Funding Rounds Are so Important for Tech Startups

Why Series A and Series B Funding Rounds Are so Important for Tech Startups

Almost every startup that reaches the market will start with a few early funding stages such as pre-seed, seed, and angel investment rounds. What follows is known as Series A, B, and sometimes even Series C funding rounds. These rounds are what separate the real business successes from the promising ideas that never materialize into full-scale companies.

In this article, we’ll explain the essential information that founders need to know about Series A and Series B investment.

What is a Series A investment?

A Series A funding round is done when one or a collection of angel investors or venture capital firms provide significant funding to a startup in exchange for an amount of equity in the company. By definition, this funding is typically in the range of USD $2-10 million. Generally speaking, Series A funding rounds are preceded by a Seed round. However, it’s not uncommon for companies to skip the seed stage and start at a Series A funding round. 

To qualify for Series A investment, a startup should have a proven, market-based system and be capable of rapidly growing revenue within one to two years.

A company will be looking to expand via funding if it has an established product and business model, but has yet to scale it in order to generate substantial revenue. This is when the company will look to connect with an angel investor, venture capital firm, or private equity firm. The investor(s) will provide funds to hire personnel and expand in various other areas of business.

Series A rounds help companies grow and scale at an accelerated pace thanks to an influx of cash. Venture capitals typically expect expansion plans to be completed, resulting in considerable growth in revenue. They also look for the company to scale quickly, which can sometimes be overwhelming for a startup if they are unprepared with their market-fit system. 

Angel investors and venture capitalists are prudent investors. Potential alone isn’t always enticing enough to get Series A funding, but potential combined with a robust and realistic business plan can do the trick.

What is a Series B investment?

A Series B funding round is similar to a Series A round in that it is merely the second round of funding for a business through venture capitals, angel investors, and private equity firms. It can also include crowdfunding and credit investments, though this is less common. 

By definition, a Series B round of funding is invested only after a Series A round. This is because companies sometimes need time to achieve steps of expansion in order to fulfill their investor’s expectations. Series B (and Series C, D, E, and so on) rounds provide a structure to a company’s expansion. Each Series round can be dependent on achieving new milestones that eventually lead to the company fulfilling its potential at scale.

Series B rounds are typically valued much higher than Series A rounds as companies should have grown in the meantime. Equity investors are generally more prone to requesting convertible preferred stock in return for Series B investments. What truly sets a Series B round apart from a Series A round, though, is the access to public markets where they can search for further capital.

Why are these rounds important?

The early stage funding rounds that a startup goes through are crucial to the launching of a company as they provide an opportunity for outside investors to invest money in, and help grow a company. 

From the outside, the exchange of investment for equity during a Series A or B round is a benchmark of recognition in a company’s potential. For the startup itself, this fundraising is a building block to realizing the ultimate goal of transforming ideas and potential into a legitimate business.