Investment Rounds for Dummies #1
Investment rounds are an essential part of the entrepreneurial journey. It is a long process that will take a lot of time off from the founders and that will take away time from them doing what they do best: building the company.
Let’s talk about the different investment rounds stages that a company can be in and when do they normally happen. I’ve structured this post so you can decide who much do you want to read (let me know if you like it):
Names of investment rounds
Explanation
So what is an I nvestment Round? It is a form of financing that start ups use to get the money to run the company in which you get MONEY in exchange for EQUITY.
There is a whole way of naming each round depending on the moment in which the company is when you close (“closing” meaning the day you get the money in the bank account). Let’s get into them:
Friends, Fools and Family. Little money, very early stage.
It stands for Friends, Fool and Family. It is normally a very early stage in the financing in which the investors have personal ties with the founders. They normally get a very little part of the equity and they don’t get a lot of rights (this will be important in a later stage). They are normally not involved at all in the management or operation of the company. It is also called “pre-seed” round if you manage to get money from more “formal” investors.
Angel investors. Some money (3–6 months). Early stage.
Whenever you have an idea more matured and maybe even a product already, you look for “angel investors”. They will not invest a lot of money, but they will ask for a larger part of the equity than the FFF. They not very involved in the management of the company, but they will provide some kind of advice or assistance.
Venture capital. First large round (6–12 months). Proof of concept.
A company would normally raise a Series A Round whenever they have proved that the company can be profitable. Venture Capital investors usually ask for seats in the board of directors and they will also have some veto rights on strategy decisions of the company (changing the business, raising more money, etc.) This is the first big financing round that is aimed at exponentially growing the company and valuations start getting serious.
Venture Capital and Private Equity. Subsequent large rounds. Further growth of the company.
After the Series A Round, if the company has more financial needs for the operation or for specific projects (sometime it is to finance a specific growth strategy, an acquisition or a new product). The rights assigned to the investors in these rounds are similar to the Series A investors but with preference (we will talk about this in a later post). If the company keeps growing, the valuations will keep going up.
Last stage. Private equity and other investors. Capital markets. Final stage of equity financing.
IPO stands for Initial Public Offering and it means listing the shares of the company in the stock market. This is the final step of t he equity financing of a company and it will normally terminate all special rights that previous investors had (normally also terminating the Shareholders Agreement — we will talk about this).
Some rounds of some companies are normally in-between two of these categories, but there are infinite options (of course).
Let me know if you still have any questions!
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Originally published at https://www.antoniodelaesperanza.com on May 10, 2017.