Defining Angel Investing Rounds

November 6, 2019

Defining the investing rounds when it comes to angel investing is important to understand. Whether you are an entrepreneur looking to get your start-up off the ground or an angel investor looking to get in on the ground floor of the next Swell or even FaceBook, you may have questions as to how new businesses raise money, early on.

How Do We Define Investing Rounds?

First Things First

Certainly, entrepreneurs would love it if getting start-up capital was as easy as one, big business loan that was just what was needed to kick things off. The reality is that for most people, it is not that simple. Rather, investors and entrepreneurs look at what are called, “funding rounds”. The idea behind funding rounds is that instead of giving a start-up a huge, lump sum, up front, the needed capital is instead solicited and awarded in increments, allowing the business to achieve certain pre-determined milestones before the next funding round.

Meanwhile, the time in-between these funding rounds is known as the, “runway”.  The length of time that a runway may last, varies from one business to the next. For some is may be as short as six months, while for others, the runway could last well over a year.

Regardless of where an entrepreneur may be in the funding rounds, one thing is certain: each round requires a great deal of work to prepare, keen marketing storytelling, and patience.

So, how does one define the various rounds in angel investing?

Seed Round

Most people are familiar with the term, “seed money”, but what does that actually mean? The seed round is the very beginning: the seed that needs to be planted in order for the business to grow. For some people, this may mean investing their own savings. This may seem like a scary proposition, but by not doing so, an entrepreneur may be sending the wrong signal to future, potential investors. After all, who wants to invest in a company that the founder doesn’t even believe in enough to financially support?  

For others, raising seed money may mean turning to family members and friends to invest. This approach, depending upon the personality of the potential investor and what they are looking to get in return, may result in the first real company pitch and business plan proposal. Some people even consider this the, “pre-seed” rounds.

Of course, not everyone may have the means to invest a significant amount of their own money and they may not have family or friends who have the means to invest, either. As such, many people will also turn to crowdfunding as a means of raising seed money. This can also be where angel investors may first become involved, as well as incubators and accelerators.

Once to the point in the fund-raising efforts that one is turning to angel investors or venture capitalists, there are needs to be a definite plan in place, which includes:

  • Gathering data
  • Researching investors
  • Create a strong pitch deck
  • Hone the presentation
  • Attending investor meetings; making the pitch
  • Field term sheets and offers
  • Survive due diligence
  • Closing the deals: lots of paperwork to be filed and (hopefully) wire transfers

Due to the amount of work involved, it is not uncommon to seek the guidance of investment bankers and fundraising professionals.

Series A

While the seed round is often times still a lot of fact-finding: market research and getting things set-up, the Series A round is where investors are looking to really see where their money has been spent and what kind of progress has been made. Revenue may not yet really be the endgame here, but key metrics, areas of improvement and growth opportunities definitely are.

At this stage of the game, the primary investors are generally angel investors or venture capitalists. As such, this is often where the business may start looking to their investors for professional guidance. After all, this where a start-up has to really demonstrate the ability to scale up and given the SEC requirments involved with being an angel investor, there is potentially sounds wisdom to be offered.

Additionally, in the  Series A funding round, one may also find family trusts or estates and hedge funds participating as investors.

Series B

Growth is the name of the game when one gets to the Series B funding round. In this round, the capital raised is typically for building or growing teams, expansion into new geographic markets, and just overall scaling. As such, a company must be prepared to demonstrate the successes up to that point as a result of the previous funding rounds.

Considering the growth that is generally associated at this funding round, the amont of the financial ask tends to also be greater, often upwards of $10M. This is due both to the expectation to really empower the growth efforts, but also because a start-up should not necessarily expect to be seeing huge profits yet. However, even though the profit may not yet be significant, the company should be running more or less smoothly by this point.

Therefore, this is also a time for many start-ups to exercise some caution and not try to do too much too quickly. The temptation may be there to start looking at other companies which to acquire, however, at this stage, it could be troublesome to make that leap. This is another time in which leaning into the expertise of the investors can be wise.

Series C and Beyond

Start-ups that get to the Series C funding round are doing quite well for themselves, as they are often, by this point, valued at over $100M. As such, at the Series C funding round, the capital that is generally being sought is in the $50M range.  This may be the time in which it is the right move to look seriously at acquisitions, or it may even be the right time to exit with a buyout.

While it may sound as though the Series C funding round is the equivalent of Charlie’s golden ticket, it is often the most grueling. At this stage, a company is working with some of the biggest venture capital firms in the world, possibly even corporate-level investors. As such, one can trust that the demands will be much greater in terms of demonstrating things like the return on investment and cost benefit analysis, along with market research and sustainability.

The Closing Bell

In today’s market, it is nearly unheard of for a start-up to get itself off the ground without various fundraising efforts. The key is be clear on the business’s mission and vision, and to have solid pitches, business plans and strategies in place, to ensure that raising capital doesn’t get in the way of launching and then growing, the company.