Startup Fundraising Entry Point & Terminology
Let’s be honest - startup terminology uses more buzzwords and acronyms than most industries out there. While navigating the entrepreneurial world as a founder can be a daunting task, taking the path into startup fundraising is a whole new hat to be worn. While traditional VC/Angel fundraising might not be applicable to every startup, mastering these terms is crucial for any entrepreneur seeking to understand the capital options needed to fuel their ventures. In this article we’ll break down and demystify the most essential fundraising terminology, empowering you to engage with investors confidently and effectively.
Understanding the Fundraising Lifecycle
Before delving into the key terminology, it's essential to grasp the typical fundraising lifecycle of a startup. The journey often begins with bootstrapping, where founders self-fund their venture using personal savings or revenue generated from initial operations (or other ventures). As the startup gains traction, it may seek external funding from angel investors or venture capitalists (VCs) through various rounds, each with its own set of terms and conditions.
This doesn’t mean that every startup chooses to fundraise however. As a founder you determine the speed at which you want your company to grow. Traditionally, bootstrapping might result in your team retaining a majority of your equity but growing at a slower rate compared to raising institutional capital.
Pre-Seed and Seed Funding
The earliest stages of external funding are often referred to as pre-seed and seed rounds. Pre-seed funding is typically sought before the company has fully launched, covering expenses such as market research, product development, and initial team building. Seed funding, on the other hand, is the first official equity funding round, averaging between $250,000 and $5 million, depending on the industry and the startup's stage. This is all subject to the current market evaluations and conditions however, as we’ve seen seed rounds into the $30M+ range and beyond.
Series A, B, C, and Beyond
As the startup progresses and achieves more and more significant milestones, it may seek additional funding through subsequent rounds, commonly referred to as Series A, Series B, Series C, and so on. Each round typically raises a larger amount of capital compared to the previous one, with Series A funding ranging from $2 million to $15 million and later rounds reaching even higher figures. As one would assume, the more rounds a company raises the more the original founders’ equity is diluted to make room for more investors.
Key Terminology
Below are some key terms every startup founder should understand regardless if you’re planning on raising capital or not.
Runway: The amount of time a startup has before it runs out of cash, based on its current burn rate. Extending the runway is crucial for sustaining operations and achieving key milestones.
Burn Rate: The rate at which a startup is spending its cash reserves, often expressed as the amount of money spent per month.
Valuation: The process of determining a startup's worth, which is a critical factor in negotiating investment terms. Pre-money valuation refers to the value before a funding round, while post-money valuation is the value after the investment.
Dilution: The decrease in the ownership stake of existing shareholders due to the issuance of new shares during a funding round
Dilution is a common occurrence and is often necessary to fuel growth.
Term Sheet: A non-binding agreement that outlines the key terms and conditions of an investment. It serves as a summary of the proposed deal and is a precursor to more detailed legal documentation.
Lead Investor: The primary investor in a funding round who takes the lead role in coordinating the investment and establishing the key terms.
Convertible Note: A type of funding that starts as a loan but can be converted into equity if certain conditions are met, such as a future funding round or an exit event.
Exit Strategy: The plan for investors to eventually realize a return on their investment, typically through an initial public offering (IPO) or an acquisition (also known as an "acquihire")
Angel Investor: Wealthy individuals or groups who provide early-stage funding to startups, often in exchange for equity.
Venture Capitalist (VC): Professional investment firms that specialize in providing capital to high-growth startups, typically at later stages, in exchange for equity
Accredited Investor: An individual or entity that meets certain income or net worth requirements, as defined by regulatory bodies like the SEC, and is therefore permitted to invest in certain types of private offerings
Anti-Dilution Protection: Provisions that protect investors from having their ownership stake diluted excessively in future funding rounds.
Data Room: A secure virtual space where confidential documents and information are made available for review by potential investors during due diligence.
Growth Metrics: Key performance indicators (KPIs) that investors use to evaluate a startup's growth potential, such as annual recurring revenue (ARR), monthly recurring revenue (MRR), customer acquisition cost (CAC), lifetime value (LTV), net dollar retention (NDR), monthly active users (MAU), daily active users (DAU), and churn rate.
Market Metrics: Measures that help investors assess the potential market opportunity for a startup's product or service, including total addressable market (TAM), serviceable addressable market (SAM), and share of market (SOM).
Balance Sheet Metrics: Financial metrics derived from a startup's balance sheet, such as future cash flows, cost of goods sold, depreciation and amortization (D&A), and earnings before interest, taxes, depreciation, and amortization (EBITDA).
For more detailed reading and content, we recommend some of the following books:
If you’re interested in determining if raising capital is the right move for you and better understanding your fundraising journey, learn more about membership at Gildre.
