• There are 2 ways of VC financing: debt financing and equity financing.
  • Debt financing is like taking a loan from a bank. Money is lent to a startup, with an interest rate IR to be returned later. Debt financing is usually used for later-stage rounds.
  • Basically VC investors provide Equity financing. It gives investors a share of a company, plus dividends and decision-making rights. They get a certain number of preferred stocks in exchange for cash.
• People have different taxonomies for funding rounds, and that's okay. The names of rounds are just labels given to businesses based on certain characteristics. However, I prefer to categorize all funding rounds into the following categories:
  • Pre-seed
  • Seed
  • Series A
  • Series B
  • Series C and so on
• Each funding round has its own set of characteristics, such as:
  • Requirements from investors
  • Types of investors involved
  • Investment size
  • Priced / unpriced round
  • Valuation size / Valuation cap size
  • Equity size
  • Investment vehicle
• There are two types of rounds: priced and unpriced.
  • Priced rounds involve specific valuations, typically for businesses with a proven business model and strong traction. Sometimes people refer to a priced round as an equity round or a qualifying round.
  • Unpriced rounds, on the other hand, do not have specific valuations and are more common for early-stage companies.
• A Series A is usually the first-priced round, but it's not a must. Valuation and negotiations with investors determine the round. Pre-seed can be a qualifying round but involves extra time and money for structuring and lawyers.
• Investors use different investment vehicles, depending on the availability of valuations (priced or unpriced rounds).
  • Unpriced rounds: basically Convertible Note or SAFE.
  • Priced round: Equity investment.
• Companies sought to decrease fundraising rounds, as it could lead to investors questioning the company's planning. Seeing a Series K round could make a VC think, "What's wrong with you?" It appears the company has been unable to reach an IPO despite its fundraising.
• As more rounds of funding were being issued with the same terms, either at the same or different price as the earlier round, investors began to refer to them as numerical round extensions.
  • For example, when the same investors who invested $10 million in a Series B added another $5 million to the company on the same terms, this became the Series B-1. If another $5 million was invested at the same terms, this was called the Series B-2.
• You may have heard of a Party Round. It's a type of funding round in which a group of investors, often friends and family, contribute small amounts of capital to a startup without any formal terms or agreements.
• You may have heard of a Down Round. A down round is a funding round in which a company raises capital at a lower valuation than in a previous funding round.
• You may have heard of a Bridge Round. A bridge round is a type of funding round that provides a startup with additional capital to help bridge the gap between two funding rounds.
  • Startups that have raised a lot of capital often use bridge rounds as extra funding until they secure a bigger round. This can happen due to delays, extra costs, or slow growth.
  • They can be debt or equity financing and may include convertible notes, warrants, or other securities.
  • Bridge rounds can be costly, with less favorable terms, and can signal to the market that a company is in trouble, making it harder to get future funding.
• Sizes of funding rounds can change from year to year depending on a variety of factors, such as market conditions, investor sentiment, and the performance of startups in the market.
• The characteristics of each funding round highly depend on sectors, geography, and other variables.