Typically a company raises numerous rounds of capital through its lifetime. While there are not rigid rules about the fundraising stages, I have attempted to characterize these stages below. Note that these stages reflect the IT space and can differ greatly in other sectors.

Friends and Family: F&F capital is the starting point of the company that is often used for basic administrative details including corporate formation, market research and the creation of a business plan.

• Typical Round Size: F&F rounds can be as small as $5K and as large as $100K.
• Investment Structure: Convertible note or common stock.
• Hurdle For Next Stage: Business plan; management team.

Seed: Seed investments are typically provided to companies that have a business plan and a management team, but do not have a product. At this point, companies are raising money based upon an idea and a team.

• Typical Round Size: These are typically $100-500K but can be as large as $1M.
• Investment Structure: Convertible note or common stock.
• Hurdle For Next Stage: Product.

Series A: The word “Series” implies institutional money (money invested by a VC). The letter “A” means that it is the first institutional round. By the series A most companies have a product that is ready (or close to ready) to take to market.

• Typical Round Size: These are typically $2-5M but can be as little as $1M and as large as $10M.
• Investment Structure: Participating preferred stock.
• Hurdle For Next Stage: Market adoption.

Series B: Typically in order to raise a Series B the company needs to have demonstrated market traction, further developed the business and recruited a more robust management team.

• Typical Round Size: These are typically $5-10M but can be as little as $5M and as large as $20M.
• Investment Structure: Participating preferred stock.
• Hurdle For Next Stage: Growth.

Series B and beyond: After the Series B round the required achievements more frequently vary by company. Some companies are nowhere near profitability and need more capital to stay alive and others are profitable but need capital in order to accelerate growth.

Comments

[Laurent Kretz]

Hello Mark,

Thanks for GetVenture, always great readings.

You say that the F&F round goal is to come up with a biz plan and a team, and that the seed round goal is to come up with a product.

How often do you hear of startups coming up to the seed with already a beta product (outsourced, for instance) and no team ? What is your take on this situation ?

[Ross Siegel]

Hi Mark,

Great site. Very helpful and informative.
Quick question: F&F round is self-explanatory, Series A round is clearly for VCs, but who generally provides the seed capital? In other words, if I'd like to build a product before I go to a VC-- which you seem to imply is a good idea-- in the form of seed capital, who do you recommend I go to with this request? Or, do VCs commonly handle Seed rounds as well?
Thanks!
-R

[Mark Davis]

I owe two responses.

First, Laurent - there are no rigid rules around the alignment of operational and financial steps. It's not entirely uncommon for a team with a beta product to raise seed. However, sometimes entrepreneurs will come looking for seed and through conversations with the VC realize that they are ready for a Series A round.

Second, Ross - seed capital can be raised in several ways. Friends and family, angels or venture investors may do seed rounds. In fact, DFJ Gotham Ventures (www.dfjgotham.com) is now making seed investments of $100K to $500K.

[Rob]

Hey Mark -

This info is great. I find myself going back to old posts as a get further along in my start-up.

In this post, you noted that a convertible note is a way to raise Friends and Family money. How would you recommend creating a convertible note for a family member? We are bootstrapping and would like to keep legal costs to a minimum as we create our Beta site. Are there low cost resources available that would assist us in creating a convertible note, or is this traditionally handled by a lawyer?

Any insight you could offer would be much appreciated.

Thanks.
- Rob

[Mark Davis]

Rob,

It's possible that there are template version of notes available on the web somewhere. Do any of the other readers have thoughts about good legal document resource websites?

-Mark

[tony brown]

Well now I'm really confused. I have a great idea/concept, presentation & business plan. Have no seed from F&F. With no seed $, how can I ever put together a mgmt team? And without a mgmt team, how can I attend my first sit down with a VC? Don't they expect strong mgmt to already be in place.

[Mark Davis]

Tony,

The milestones that I laid out for each round of financing are high-level guidelines, not more. There are always exceptions. Companies that are just a piece of paper and an entrepreneur have received Series A capital before.

As for your specific situation, the answer depends on the VC. Some VCs will probably suggest that you start building out your team, attracting other managers with the idea alone, and other will move forward in the process and help you recruit talent simulatneously. Ultimatley, this process looks a little different for everyone.

When designing your fundraising strategy simply try to do what would be best for building your company. However, be prepared to be flexible and change course if all of the investors recommend a different process.

-Mark

[Justin Chu]

Mark,

Can you describe the risks for friends and family members when they are approached to bootstrap a new startup. Also should they just accept the convertible note offered for the investment or equity would be a better option? Are there any other incentives one can ask for prior to funding a bootstrap?

Thanks