What are rounds when raising for a startup?

Tl;dr: When you raise capital is it a round. Startups many rounds of capital until they exit or shut down. Rounds have meanings. 

You want to raise money. Perhaps you have been asked, “what round are you raising at?”, or you have heard “what is the hardest round to raise at?”

I’m going to explain this simple to you.

What is a fundraising round?

You have normal people and you have crack addicts.

In the same manner that fiends need their hit, founders will need their fundraising hit to make payroll.

Once you are on the VC pipe unless you get profitable and want to have awkward conversations with your investors about your new course (Buffer did this), you are a crack hoe and need a regular re-up.

Founders need to raise milestones so they can raise more money at better valuation terms to keep the train going choo choo as they expand.

Thing is, when you are a kid, no one trusts you. You are still sucky at coloring in so they will only give you pocket change of a few hundred thousand dollars.

When you are Mark Z, you can change your name to Meta you can still raise billions.

The difference between a zero and awkward hero is around 10 rounds of funding.

Your valuation is very dependant on what you have to show and the story you have to tell. Assuming things are fairly linear, you raise more money the more that time goes on.

It makes no sense to raise for 3 years at today valuation when you know you can 3x your valuation in 12 months. So founders raise a round for 12 months at today valuation and then they raise again at a higher valuation to keep it up.

Each round comes at a cost to founders’ ownership of their company at expense to investors.

So unless you are a masochist, you re-up at the best possible terms with your VC dealer.

What are the different rounds?

I don’t actually like drugs, so I have limits on my analogies. I probably should have come up with something better for continuity purposes.

You know the way that there are super nerds that speak Klingon? Well, in startup, VCs have their own terms and phrases, and with language the meaning of words changes over time such that no one is quite sure what things what things mean anymore.

Go back ten years and the terms for rounds were more limited and commonly understood.

Hab SoSlI’ Quch!

That apparently means “Your mother has a smooth forehead!”

The note was “Note: this is a powerful insult; don’t say it to friends.” I personally like my mother’s smooth forehead.

See, even Klingon has different interpretations.

Sorry, focus, I have my ADHD.

In the past rounds were:

• Seed
• Series-A
• Series-B
• Series-C-Z

This meant in the 2000s (This is a joke version):

• Seed- buy servers and a domain name
• Series-A – buy more servers with a better pitch, lol
• Series-B – fund writing an S-1 filing
• Series-C-Z – Let’s IPO (if not already)

A lot of people don’t know this but series-X is actually a legal term for a class of stock.

Words in fundraising language can be very pregnant. The most loaded example is series-A. That means a lot to investors, even if founders don’t know it, and neither to the lawyers who think it is a legal term.

Around 2010s things made more sense:

• Angel – You worked at Yahoo! and have a pitch deck? Ok
• Seed- Some people seem to really like your product. You aren’t making money yet but we can figure that out later
• Series-A – You have hit $1m ARR. Things are going well. You don’t have a strong management team across the board, but you can hire them with the money since it’s time to bust a moce
• Series-B – Wow, you did well!  You’re a nice $5m ARR business and know how things work, you need to do more of that now.
• Series-C-Z – Your cohorts are great.  You are kicking ass, you will be worth a lot, but let’s see how much. Here is a zoton amount of wonga and I’ll keep giving you money as you perform and show me numbers

Don’t get me wrong. It was still hard to raise an angel and seed round, but you could do it. Tech was still harder, not for hardware, but the absence of SaaS services.

Series-A was a real a bar, but it meant you are ready to take on some real money. It’s an acceptance into an exclusive club of you are in the real VC fundable land we care about. After series A you are in the land of growth investors who do things their way since they have numbers.

Into the 2010s, things changed at the early stage (seed became a phase) and at the later stage, crazy deals started happening. 2020 was when things officially got weird though.

• Angel – You have built something basic with some users / tell a story
• Pre-seed – You have some users, something is going on
• Seed – Something else is happening. Who knows you raised $10m just now
• Seed extension – You don’t want to call it an A round so you raise $5m
• Seed plus extension – Who knows?
• Pre-A – There is some logic why you aren’t ready for a $20m and are staying in stealth mode
• Pre-A  bridge – Making things up now…
• Series-A – Exactly the same as before other than the bar is up a bit more. If it was $1m before, it is not $1.5m (officially)

As far as I know, everything after an Official A stayed the same, only the check sizes are changing rapidly.

Tiger and Softbank really made everything get weird.

Do things change between rounds?

Crap. I’m trying to churn out a bunch of simple blogs to teach founders who have no idea.

I map out a blog before I fill it out so I know what to write but I get carried away.

If it wasn’t obvious already, things change between rounds and even what the definitions are.

I honestly believe no one really knows what a seed round means anymore without clarification.

What you need to know is:

• Seed: You have built something that seems promising but has limited framework to scale
• Series-A: You are worthy of the attention of larger investors. It’s a bet to see if you can get larger
• Series-B: Let’s see how you do with a lot of money
• Series-C+: Take my money and own the market