How to Get Venture Funding, page 8

Different Stages of VC Funding, continued

The amount of money involved depends on many circumstances. Some businesses are just more capital intensive than others. But a reasonable range for a seed round is between $100,000 and $1 million dollars.

A company that has already made some progress can raise a first, or post-seed, round of funding. Generally, to be eligible for first-round funding, a company should have an executive team in place, a product or products ready to go, and some demonstrated traction with customers. In other words, the VC should be able to feel that this is a “just add money” situation—all that the company needs to bring in substantial revenue is an infusion of capital. There are no hard and fast rules for the amount of money involved in this round, but the range might be between $1 million and $10 million dollars, with $2 million or $3 million dollars being pretty typical. It’s extremely common to have multiple VCs invest at this round, but one VC, called the lead investor, typically signs on first. From the point of view of the lead investor, other VCs enable risk sharing (and make sure that the lead investor’s capital can be used for more deals). From the viewpoint of the other VCs participating in a round, the lead investor does most of the work, such as the due diligence reviews. So it’s a labor-saving way to participate in deals.

Depending on circumstances, second, third and even fourth rounds follow the initial funding round. In the boom years, it was taken for granted that each round would be at a higher valuation and involve more invested money than the prior round. It was a real insult and a step backwards to be offered money at a lower valuation than a previous round.

This is no longer the case. Many companies must take funds where they can find them. Certainly, valuation is negotiable, and it has become common to find subsequent rounds with valuations lower than in the early rounds.

By the time a company gets to second and subsequent rounds, it may be, by some standards, quite a going concern with hundreds of employees, human resources bureaucracy, customers and significant revenue. In boom times, a company like that would be preparing for a public offering. These days, the company is more likely to be investigating a liquidity event such as the sale of the company.

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