Raise your next round on StartEngine. Apply Now
Raise your next round on StartEngine. Apply
Get iOS App Sign Up
September 7, 2023 | 8 Min Read

How Startup Funding Rounds Work

startup funding rounds

How Startup Funding Rounds Work

Many startups aspire to be the next big thing, but every business must start small. If you are an investor, you have the potential to be part of the initial push to get a project off the ground. But the odds are long: while about 80% of small businesses survive their first year, only half reach the five-year mark, according to government statistics.

The moral of the story? In the startup world, failure is not uncommon, and investing in startups is risky. As a result of that risk, an investor can receive a great return on their investment, but they must choose the company they invest in carefully.

However, before you explore the companies on StartEngine and invest, it’s important to have a framework of funding rounds to understand how startups finance their business and grow. This knowledge can help you place the company’s metrics and growth strategies into context.

If you’re looking for clarity on how startup funding rounds work, then you’ve come to the right place. So let’s break it down.

Pre-Seed Round Funding

In the earliest stage of a company’s development, founders are just beginning to make their operation a reality. At this point, they may have a small team developing a business plan, marketing strategy and, if applicable, a prototype, but they often haven’t generated any revenue yet. Pre-Seed funding typically comes from the founders themselves, as well as friends, family members, and of course crowdfunding (you know we’re gonna plug it). The amount of capital raised during this round can vary; some businesses will raise $10,000, while others will raise up to $1M.

Seed Round Funding

The Seed round represents the first formal round of funding. As the name suggests, these early investments represent the “seed” from which the business will grow. With this funding, companies can go on to earn traction with consumers, showcase their product/market fit, or develop other tangible signs of growth and promise that will be necessary to raise future rounds of funding (more on that later).

Interestingly enough, as equity crowdfunding has grown in popularity, the number of seed deals from venture capitalists and angel investors has decreased.

Source: https://pitchbook.com/news/articles/21-charts-showing-current-trends-in-us-venture-capital

At the seed funding stage, companies are still little more than an idea, and investing is a risky proposition. However, the potential upside on your investment is much higher because equity generally is less expensive the earlier you invest in the business.

With each new funding round, companies will generally look to increase the price per share of their offering, usually resulting in higher valuations during each subsequent round.  This is called a risk premium, and rewards earlier investors with a better price per share in exchange for making investments while the companies are still at a much riskier development stage. This all means that the earlier you invest, the more likely you are to get a lower price per share, in comparison to future rounds.

Companies often raise around $1M-$2M in a seed funding round. Both pre-seed and seed funding rounds are akin to what companies can raise under Regulation Crowdfunding on StartEngine.

Series A

At this point, businesses usually have a decent amount of users, incoming revenue, or other key performance indicators. However, in most cases the startup still isn’t profitable and needs to continue raising capital.

The company needs to show investors their vision and strategy that will create long-term profits in order to raise their Series A, a round which can range anywhere between $3M-$15M, though, especially in the past few years, some tech startups have raised $25M+ in a Series A.

For investors in the Seed round, the Series A means that there are now more investors in the business and more shares have been issued in the company. This also means that the seed investor owns a smaller percentage of the entire company.

This is a process called dilution (as more shares are issued to new investors, the seed investor’s shares are now a smaller percentage of the total). This isn’t a bad thing for early investors because while you may own a smaller percentage of the company, if the company is growing it usually means investors are investing at a higher price, signaling that the value of your shares may have increased.

Series B

After leveraging the Series A funding, businesses become well-established. They have a growing user base and foothold in the market, but they often need funding to improve operations and achieve scale. So they raise capital once again with a Series B, which generates around $20M or more in funding.

In a Series B round, many new investors will participate, but sometimes you will see some of the same investors that participated in the Series A invest again in the Series B. Investors sometimes invest in a later round to maintain their level of ownership in a company (often through pro rata rights) and avoid their ownership percentage being diluted by new shareholders.

Series C, D & Beyond

After this point, businesses are financially successful and have achieved a level of market popularity. Future rounds of funding are focused on further scaling the business, entering new markets, dominating said markets, and acquisitions.

Generally speaking, the level of risk has decreased compared to previous funding rounds because the company has now proven its success. As a result, later funding rounds greatly increase in size (hundreds of millions of dollars) as investors (and the company) swing for the fences to try and achieve market dominance.

Exiting Your Investment

Traditionally, an IPO (Initial Public Offering) marks the first time a private company offers shares to the public. An IPO is an opportunity for the company to continue raising money while allowing millions of ordinary people to buy its stock. It’s also an early investor’s first chance to sell their stock for cash and exit their investment (hopefully at a profit). The other historical alternative for an exit is if the company is acquired.

However, equity crowdfunding changes all of that. Not only can the public now invest in companies before the IPO, but one day we hope they will be able to exit their investment sooner too (as IPOs and acquisitions can often take anywhere from 5-10 years before they occur).

At StartEngine, we launched StartEngine Marketplace*, the hub for our new bulletin-board where you can tell fellow investors when you’d like to buy or sell shares from prior funding rounds on any crowdfunding platform.

This means StartEngine provides an additional channel for investors to potentially exit their investments through our trading platform, rather than being restricted to historical exit channels like IPO or acquisition.** Our goal is to say goodbye to the 5-10 year waiting period, and say hello to the future of investing.


 

* StartEngine Marketplace (“SE Marketplace”) is a website operated by StartEngine Primary, LLC (“SE Primary”), a broker-dealer that is registered with the SEC and a member of FINRA and SIPC. StartEngine Bulletin Board (“SE BB”) is a bulletin board platform that advertises interest in shares of private companies that previously executed Reg CF or Reg A offerings. SE BB enables shareholders to communicate interest in potential sales of shares in private companies and investors to discover, review, and potentially invest in private companies. As a bulletin board platform, SE BB provides a venue for investors to access information about private company offerings and connect with potential sellers. future of investing.

While a security may be displayed on the bulletin board, these securities will be subject to certain restrictions which may prevent the ability to buy and sell these securities in a timely manner, if at all. Even if a security is qualified to be displayed on the bulletin board, there is no guarantee an active trading market for the securities will ever develop, or if developed, be maintained. You should assume that you may not be able to liquidate your investment for some time or be able to pledge these shares as collateral.

SE BB is distinct and separate from StartEngine Secondary (“SE Secondary”), which is an SEC-registered Alternative Trading System (ATS) operated by SE Primary. SE Secondary facilitates the trading of securities by matching orders between buyers and sellers and facilitating executions of trades on the platform.

** There is no guarantee that a market will develop for such securities. The bulletin-board offers a potential avenue for purchasing and/or selling shares in private companies, but it does not guarantee liquidity. Each investment also carries its own specific risks, and you should complete your own independent due diligence regarding the investment. This includes obtaining additional information about the company, opinions, financial projections, and legal or other investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

Want to stay up to date with the latest posts from StartEngine? Sign up here:

You May Also Like

Important Message

IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. INVESTMENTS ON STARTENGINE ARE SPECULATIVE, ILLIQUID, AND INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE POSSIBLE LOSS OF YOUR ENTIRE INVESTMENT.

www.StartEngine.com is a website owned and operated by StartEngine Crowdfunding, Inc. (“StartEngine”), which is neither a registered broker-dealer, investment advisor nor funding portal.

Unless indicated otherwise with respect to a particular issuer, all securities-related activity is conducted by regulated affiliates of StartEngine: StartEngine Capital LLC, a funding portal registered here with the US Securities and Exchange Commission (SEC) and here as a member of the Financial Industry Regulatory Authority (FINRA), or StartEngine Primary LLC (“SE Primary”), a broker-dealer registered with the SEC and FINRA / SPIC. You can review the background of our broker-dealer and our investment professionals on FINRA’s BrokerCheck here. StartEngine Secondary is an alternative trading system (ATS) regulated by the SEC and operated by SE Primary. SE Primary is a member of SIPC and explanatory brochures are available upon request by contacting SIPC at (202) 371-8300.

StartEngine facilitates three types of primary offerings:

1) Regulation A offerings (JOBS Act Title IV; known as Regulation A+), which are offered to non-accredited and accredited investors alike. These offerings are made through StartEngine Primary, LLC (unless otherwise indicated). 2) Regulation D offerings (Rule 506(c)), which are offered only to accredited investors. These offerings are made through StartEngine Primary, LLC. 3) Regulation Crowdfunding offerings (JOBS Act Title III), which are offered to non-accredited and accredited investors alike. These offerings are made through StartEngine Capital, LLC. Some of these offerings are open to the general public, however there are important differences and risks.

Any securities offered on this website have not been recommended or approved by any federal or state securities commission or regulatory authority. StartEngine and its affiliates do not provide any investment advice or recommendation and do not provide any legal or tax advice concerning any securities. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. StartEngine does not verify the adequacy, accuracy, or completeness of any information. Neither StartEngine nor any of its officers, directors, agents, and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, or completeness of any information on this site or the use of information on this site.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks, and you should complete your own independent due diligence regarding the investment. This includes obtaining additional information about the company, opinions, financial projections, and legal or other investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment. See additional general disclosures here.

By accessing this site and any pages on this site, you agree to be bound by our Terms of Use and Privacy Policy, as may be amended from time to time without notice or liability.

Canadian Investors

Investment opportunities posted and accessible through the site will not be offered to Canadian resident investors. Potential investors are strongly advised to consult their legal, tax and financial advisors before investing. The securities offered on this site are not offered in jurisdictions where public solicitation for offerings is not permitted; it is solely your responsibility to comply with the laws and regulations of your country of residence.

California Investors Only – Do Not Sell My Personal Information (800-317-2200). StartEngine does not sell personal information. For all customer inquiries, please write to contact@startengine.com.

StartEngine Marketplace

StartEngine Marketplace (“SE Marketplace”) is a website operated by StartEngine Primary, LLC (“SE Primary”), a broker-dealer that is registered with the SEC and a member of FINRA and the SIPC.

StartEngine Secondary (“SE Secondary”) is our investor trading platform. SE Secondary is an SEC-registered Alternative Trading System ("ATS") operated by SE Primary that matches orders for buyers and sellers of securities. It allows investors to trade shares purchased through Regulation A+, Regulation Crowdfunding, or Regulation D for companies who have engaged StartEngine Secure LLC as their transfer agent. The term “Rapid,” when used in relation to transactions on SE Marketplace, specifically refers to transactions that are facilitated on SE Secondary, This is because, unlike with trades on the StartEngine Bulletin Board (“SE BB”), trades on SE Secondary are executed the moment that they are matched.

StartEngine Bulletin Board ("SE BB") is a bulletin board platform on which users can indicate to each other their interest to buy or sell shares of private companies that previously executed Reg CF or Reg A offerings not necessarily through SE Primary. As a bulletin board platform, SE BB provides a venue for investors to access information about such private company offerings and connect with potential sellers. All investment opportunities on SE BB are based on indicated interest from sellers and will need to be confirmed. Even if parties express mutual interest to enter into a trade on SE BB, a trade will not immediately result because execution is subject to additional contingencies, including among others, effecting of the transfer of the shares from the potential seller to the potential buyer by the issuer and/or transfer agent. SE BB is distinct and separate from SE Secondary. SE Secondary facilitates the trading of securities by matching orders between buyers and sellers and facilitating executions of trades on the platform. By contrast, under SE BB, SE Primary assists with the facilitation of a potential resulting trade off platform including, by among other things, approaching the issuer and other necessary parties in relation to the potential transaction. The term “Extended”, when used in relation to transactions on SE Marketplace denotes that these transactions are conducted via SE BB, and that these transactions may involve longer processing times compared to SE Secondary for the above-stated reasons.

Even if a security is qualified to be displayed on SE Marketplace, there is no guarantee an active trading market for the securities will ever develop, or if developed, be maintained. You should assume that you may not be able to liquidate your investment for some time or be able to pledge these shares as collateral.

The availability of company information does not indicate that the company has endorsed, supports, or otherwise participates with StartEngine. It also does not constitute an endorsement, solicitation or recommendation by StartEngine. StartEngine does not (1) make any recommendations or otherwise advise on the merits or advisability of a particular investment or transaction, (2) assist in the determination of the fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Ready to get funding?

Join 350+ companies Successfully Raising on StartEngine

Start Your Round Today

Invest in StartEngine

190% YoY Growth: Invest in the leading equity crowdfunding platform.

This Reg A+ offering is made available through StartEngine Crowdfunding, Inc. This investment is speculative, illiquid, and involves a high degree of risk, including the possible loss of your entire investment. For more information about this offering, please view StartEngine’s offering circular and risks associated with this offering.

 

Kevin O’Leary is a paid spokesperson for StartEngine. Read the 17(b) disclosure here.

Founder's Summit Application