So you want to work for a startup. After binge-watching 5 seasons of Silicon Valley and watching the Social Network you’ve realized you want to work for fast-paced, mission-conscious, world-changing startup. That’s great to hear! Now the real question is what sort of startup should you work for? More specifically what size startup should you be working for… You have definitely heard of companies like Uber and JUUL raising 100’s of millions of dollars during their Series C or D rounds. But what about the average startup? How do they raise money? What is the size of a typical round of funding? And most importantly what does each round of funding indicate to someone looking for a job at a startup. Well, you’re in luck because you’re about to receive an education in startup funding for dummies.
First, who is investing in startups?
Before we jump into the different stages of funding it seems appropriate to start with who/where all of this money is coming from. There are a number of different and creative ways to raise money beyond venture capital firms.
- Bootstrapping– Essentially a founding team will self-fund themselves until they raise outside capital or generate revenue.
- Friends and Family– Probably the easiest people to tap into, this is usually the first place a startup will turn to for outside capital.
- Angel investors- These are accredited investors, usually well-off people investing their own money at very early stages of companies. They not only invest in companies but often times will become mentors/advisors.
- Accelerators/Incubators- Are usually sponsored programs to help startups with capital, resources, workspaces, business advice, and networking opportunities.
- Venture Capital Firms- These are professional investment firms who invest in startups and growing companies. There are many different VCs that invest at different stages and in different verticals across the globe.
- Crowdfunding– Becoming ever so much popular with companies like Kickstarter and Indiegogo, but there is a lot more startup focused ones like Fundable and Seedinvest. Thanks to the Jumpstart Our Business Startups (JOBS) Act — Startups and small business are able to seek small investments from a large number of investors.
- Loans– Definitely not the most traditional format of seeking capital for startups, it is very much a viable option to receive a loan from a bank or the Small Business Administration. In fact mattress startup Tuft and Needle essentially bootstrapped their business with bank loans until they were profitable ($170 million in revenue 2017) and eventually merged with Serta Simmons.
- Private equity firms, hedge funds, banks- Really the only time these larger financial institutions get involved is in late-stage funding when there is less risk associated with the startup OR if the company is fintech related.
Now that we know the different options for funding/raising money for startups we can get to the fun stuff! Aka how do different rounds of funding affect a company and, in turn, your job search…
Also read: The Pros and Cons of Working at a Startup
10 years ago the term “pre-seed” was virtually non-existent or known as a “friends and family” round, but with the influx of money coming into the startup ecosystem startups are consistently raising pre-seed rounds. A pre-seed is usually the first time founders will seek outside capital or investment. For the most part, founders have been bootstrapping their company to this point and need an influx of capital in order to reach the next critical milestone, such as hiring a key team member or developing the first iteration of the product.
At this stage, a startup is really just starting… The founders are most likely the only ones working on the project, but they have invested enough time to create an initial concept/product/business that is worth investing in. This is about as true silicon valley as you can get, just a couple of people huddled around some computers in an apartment or co-working space. If you’re really trying to get into the ground-level/hands-on atmosphere with serious ownership, then this is the stage of a startup you should be joining. You’ll experience a lot of sleepless nights and eating a lot of ramen, but in the end, if you believe in the mission and product, it will all be worth it.
Size of company: Founders maybe 1 employee (1-5)
Average Funding Amount: <$1 Million
What the company is valued at: $1-3 million
Where is the money coming from: Friends and Family, early-stage angels, accelerators/incubators, crowdfunding, loan
A seed round is where you really start to see some traction within a startup, the team is growing, the product is getting off the ground, there are a decent amount of users/customers. In the past, a seed round usually meant that you were reaching out to angel investors, people in the industry who are willing investors/mentors. Though within the last 5 or so years, more and more early-stage VCs have joined the fray and really increased the size of seed rounds. The median angel-funded seed round is around $250k with the median VC-led seed size well over $2 million. With the inclusion of VCs in the seed stage, these rounds of funding are making more and more starts viable/sets them up for the long run.
At this stage, the company is starting to see a market fit and has really jumped its first big hurdle by securing a somewhat sizable amount of funding. If a company has raised a seed with quality angels and early-stage VCs there will be a bit more job security, yet a sense of urgency to really get to a Series A or other milestone. The core team outside of the founders is starting to be assembled, maybe they join an accelerator or incubator, this is really the first major portion company building. Probably not the best time to join if you are a bit risk-adverse that being said this stage is incredibly exciting, and all tasks accomplished here will be incredibly rewarding in the long run.
Size of company: 5-25
Average Funding Amount: $2.2 million
What the company is valued at: $3-10 million
Where is the money coming from: Early-stage angels, accelerators/incubators, early-stage venture capital firms, crowdfunding, loan.
Only 46% of startups who raise a seed round ever make it to a series A. At this point, most startups are very much focused on generating revenue, this is where marketing and sales become critical to the business to ensure that there is accelerated growth within the business. For some startups, this is where institutional investments start to come in from VCs, this is also the point where some of the larger household/brand name VCs begin to make serious investments.
At this the point where the startup has essentially come out of infancy, it is very much a real company with serious goals and ambitions. The team has expanded outside of the core group members and now they are poised for growth. With a series A, many companies will begin to rapidly grow their team and build out new organizational structures to support the team. This is no longer your typical bootstrapped company, a startup at this stage while still small is beginning to build out the infrastructure to support growth. A great time to join a startup, it is somewhat stable but still growing super fast, where one can gain a lot of very hands-on experience.
Size of company: 20-50
Average Funding Amount: $7.65 million
What the company is valued at: $10-20 million
Where is the money coming from: VC’s, “super angels”, crowdfunding
Series B startups are now starting to look less and less like “traditional” startups and more like full-fledged companies. A series B is less about looking at the potential of a company more looking towards how they can take that investment and scale the business into new sectors, markets, and verticals. Investors are expecting to start seeing a company make efforts/forays into progressing that investment. Raising a series B is no small feat, with massive quantities of money being thrown at companies growth is the name of the game since there is little excuse given how large some of the check sizes are.
With every round of funding, the team, company, and culture at a startup change drastically. New challenges arise with every expansion or acceleration of growth. That being said, a series B startup usually receives such a large cash infusion that the startup sees a large shift in the way it operates. With more investors and more eyes on the business, the return on investment becomes critical. The company expands faster, and with such a large infusion of cash, the company has new and exciting opportunities for expansion that early stage companies don’t have. Series B startups are a great transition for someone who is coming from a large or Fortune 500 company and wants to transition into a smaller company, but not one that is a massive culture shock.
Size of company: 25-100+
Average Funding Amount: $24.9 million
What the company is valued at: $30-100+ million
Where is the money coming from: VCs
Series C and beyond
Series C and beyond, this is where investors are starting to look at the exit strategy, whether that is an acquisition or public offering. This is also where the big money rounds start coming in, the ones you see in the news. This is for large-scale expansion, such as going international or purchasing other business. At this point, the startup has raised enough money and has a strong business model where more traditional financial institutions like PE shops and banks are willing to invest in a startup.
By far the safest/most stable startup you can join, that being said, it is well out of the scrappy stage and more into an established business. While it is probably more relaxed and innovative than the typical company, there is far more established teams and business practices involved. That being said, like any startup there are always growing pains and at this stage, certain things are not going to fly. That being said these companies are still on the verge of cutting edge. They are also still an incredibly interesting place to work with very strong opportunities.
Size of company: 100-500+
Average Funding Amount: $50+ million
What the company is valued at: $100-200+ million
Where is the money coming from: VCs, private equity firms, hedge funds, banks
The startup ecosystem is booming, at the time of this blog, 2018 is on pace to hit over $100 Billion dollars in venture funding. With so many different types of startups and various stages in their growth, it is important to know which one is the right fit for you, regardless of how much money they have raised. Be sure to check out Scouted to find an amazing job at startups across the spectrum.