No successful business gets to a stable position by raising a single lump sum of cash and calling it a day in the fundraising field. In fact, businesses engage in a series of rounds and levels, through which they raise additional cash, through different processes, structures, requirements and average payout amounts.
(Image showing growth in startup funding worldwide between 2012-2017. Image: Statista)
Each funding round is designed to take entrepreneurs and their businesses to the next milestone. At every round, founders are looking to trade equity in their company for the capital they can use to level up. It would be counterintuitive to delve into series E funding without an appreciation for the series of funding that comes before it.
What goes into each funding round?
Essentially, the process of each round typically follows the same criteria. Albeit, using different strategies and using different tools. Some entrepreneurs find it useful to adopt the help of investment analysts and consultants in the process.
- Gather data
- Research and reach out to investors
- Create a killer pitch and master presentation
- Attend investor meetings to build relationships
- Field term sheets and offers
- Close the round with transfers and paperwork
Long before Series E funding takes place, a business owner will have undergone a number of funding rounds to get there. Following the pre-seed and seed rounds, in which a business idea is made into a reality, comes a funding series from A to E.
Series A funding
Having gained some proof of business concept through initial seed funding, investors can begin to look at real data to see what the startup has to offer in terms of returns. Whilst it may be too soon to use revenue as a metric, it should be clear to see whether the business will become profitable.
If so, investors contribute capital to hone the business model into a scalable enterprise. At this level, investors are frequently venture capitalists or angel investors. They typically evaluate how seed capital was used and how well it bodes for their own capital.
Series B funding
To build on existing successes, startups at this level are looking for VC investment. Capital acquired here may be used for expansion – geographically, within the team and general scaling. Sums lay in the range of tens of millions of pounds. Profit margins may still be narrow, but the startup should demonstrate traction and a business model that works. Potential acquisitions will usually be considered at this point.
Series C funding
This stage is often one in which a company will end its funding pursuits. They’re doing well and are ready to expand, acquire other businesses and develop new products. A common feature of series C funding is international expansion. A company at this stage may also need funding to increase its valuation before an IPO or acquisition.
Series D funding
Whilst many companies will finish their funding rounds at Series C, there are a few reasons why a company may choose to raise an additional round. They may have found a new opportunity for expansion before its IPO and need a cash boost. It pays to increase the value of a company before an IPO.
Another reason for pursuing Series D funding is because a company hasn’t achieved the expectations laid out in the Series C round. This ‘down-round’ typically calls for raising money at a lower valuation than the previous round. Such incidents devalue the stock of a company – making IPOs unappealing.
Series E Funding
As we now know, very few companies make it to Series D funding. As such, even fewer make it to Series E. Companies that reach this point, may do so for many of the same reasons in Series D. That is, to stay private for longer to reach new opportunities or perhaps they’ve failed to meet expectations and news a little extra help to stabilise themselves again.
The case for entering into Series E funding isn’t always negative. In fact, equity funding at this level is a great way for successful companies to continue scaling. Fintech giant Stripe had been massively scaling internationally, as well as extending its platform into issuing, global fraud prevention and physical stores. They had no time for slowing down and follow-on funding at Series E, lent them more leverage in these strategic areas.
Keep in mind that capital raised in Series E funding will be used in different ways according to a company’s goals, growth and stability. Series E funding and help provide a company with the opportunity to boost its valuation or recover losses from a down round.
Can funding rounds after C and even D be damaging?
We understand that Series E funding can be helpful and even life-saving at times, but there may be a few damaging factors that arise out of five rounds of careless funding.
Continuous rounds of funding may result in ‘investor fatigue’. One of the major benefits of a series of equity funding is the ability to keep previous investors coming back for more. It’s vital to perform well enough to give previous investors the incentive to return in the next round. However, it’s less likely for investors to stay with a company through 5+ rounds of funding when expectations aren’t met, or if returns simply aren’t high enough.
You run the risk of appearing unable to forecast your cash needs well. This doesn’t bode well with investors, but there may be a simple way around it. Advisors suggest asking for more money than you need – as opposed to taking too little and not meeting expectations.
Raising capital is by no means easy. Nor can it be done on the side, whilst maintaining a healthy business. It takes time and can be massively distracting, putting a strain on the daily operations of a startup. This, combined with 5 or more rounds of funding is a recipe for losing track and setting back.
Benefits of reaching Series E funding
Don’t let the above reasons put you off multiple rounds of funding. It’s a pretty exclusive club, since very few companies reach this level. When done strategically and with care, there’s huge potential in multiple rounds of funding.
By staggering your capital needs, you can be less likely to give away larger portions of equity at any one go. Giving yourself different opportunities to raise capital also allows more time to figure out an exit strategy, meaning, more flexibility.
Series E success stories
In April 2020, CircleCI, the CI/CD platform for software innovation announced it has successfully closed $100 million in Series E funding. They closed a Series D funding round in July 2019 and has demonstrated strong momentum over the last 9 months. This has included an increase in overall usage with CircleCI, currently processes over 1.8 million jobs per day and the opening of a London office. CircleCI will use the Series E funding to expand on the ways it supports complex delivery needs.
On the 9th April 2020, Cohesity, data management company, announced a successful $250 million Series E funding. The round also included broad and lasting support from existing investors. The company is now valued at $2.5 billion – more than double the valuation from its Series D round in 2018.
Demonstrating that by meeting targets, gaining traction and disrupting the market; entering into a Series E funding round can significantly boost valuation and a company’s strategic positioning.