The fundraising stages are not about dollar values — they’re about risk

Haje Jan Kamps@Haje / 10:00 PM UTC+3•December 18, 2022

Image Credits: Richard Drury (opens in a new window) / Getty Images

You have probably heard of pre-seed, seed, Series A, Series B and so on. We have seen very small Series A rounds and enormous pre-seed rounds. The most important characteristic of each round is not how much money is changing hands, but how much risk is in the company.

There are two dynamics at play at the same time. By understanding them and the connection between them, you will be able to think about each part of your startup pathway in a different way.

The funding rounds tend to go in a broad line.

• The 4 Fs: Founders, Friends, Family, Fools: This is the first money going into the company, usually just enough to start proving out some of the core tech or business dynamics. Here, the company is trying to build an MVP. In these rounds, you’ll often find angel investors of various degrees of sophistication.
• Pre-seed: Confusingly, this is often the same as the above, except done by an institutional investor (i.e., a family office or a VC firm focusing on the earliest stages of companies). This is usually not a “priced round” — the company doesn’t have a formal valuation, but the money raised is on a convertible or SAFE note. At this stage, companies are typically not yet generating revenue.
• Seed: This is usually institutional investors investing larger amounts of money into a company that has started proving some of its dynamics. The startup will have some aspect of its business up and running and may have some test customers, a beta product, a concierge MVP, etc. It won’t have a growth engine (in other words, it won’t yet have a repeatable way of attracting and retaining customers). The company is working on active product development and looking for product-market fit. Sometimes this round is priced (i.e., investors negotiate a valuation of the company), or it may be unpriced.
• Series A: This is the first “growth round” a company raises. It will usually have a product in the market delivering value to customers and is on its way to having a reliable, predictable way of pouring money into customer acquisition. The company may be about to enter new markets, broaden its product offering or go after a new customer segment. A Series A round is almost always “priced,” giving the company a formal valuation.
• Series B and beyond: At Series B, a company is usually off to the races in earnest. It has customers, revenue and a stable product or two. From Series B onward, you have Series C, D, E, etc. The rounds and the company get bigger. The final rounds are typically preparing a company for going into the black (being profitable), going public through an IPO or both.

For each round, a company becomes more valuable because it gets an increasingly mature product and more revenue as it tries to figure out its growth mechanics. The risk goes down as the company progresses.

It's important that you think about your journey in that last piece. As your company gets more valuable, your risk stays the same. As risk is reduced, the company becomes more valuable. If you can use this to your advantage, you can design your rounds to make them less risky.

If you want to remove as much risk as possible at each stage of your company's existence, let's take a closer look at where risk appears in a startup.

Where is the risk in your company?

There are many different types of risk. If your company is at the idea stage, you may get together with some co-founders who have good founder- market fit. There's a problem in the market. Your potential customers all agree that this is a problem that needs to be solved and that someone is willing to pay for it. Is it possible to fix this problem?

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