So, you’ve made it to Series C. Your company has passed the startup stage, is dominating the market, and is ready for acquisition deals, new product development, or expansion into new markets. But the next step is not as easy as pie. Some believe 2023 will be a venture winter, as venture capitalists (VCs) are slowing down their check-writing pace. Also, companies must show investors a clear strategy for sustained growth, a proven track record of achieving key performance indicators, and a strong management team. Not to mention a well-defined exit strategy.
That’s why, at Founder Shield, we’ve broken down what Series C funding is and how to start prepping.
What Is Series C Funding?
Funding rounds allow startups to grow their businesses by receiving outside investment. Investors also have the opportunity to invest cash into companies in exchange for equity or partial ownership.
Seed, Series A, B, and C funding are all essential ingredients for those businesses who decide against bootstrapping, don’t want to survive off the generosity of friends and family, and refuse to dive into their own pockets yet again.
Before these funding rounds begin, analysts always undertake a valuation, which considers a company’s market size, risk, management team, and proven track record. Each series of fundraising aligns with different stages of business maturity.
Series A and B funding is typically used to help startups establish their business models and begin scaling their operations. As the fourth stage of capital raising, Series C enables organizations to fuel rapid growth and expand their already profitable businesses.
Companies that make it to Series C are no longer startups but well-established and in their last stages of development — so the average Series C funding amount is larger than previous rounds. They usually have a higher valuation, and investors are sure about their long-term odds of success. After rising through the ranks of competitors, those pursuing Series C can see fresh opportunities on the horizon, like new offices, team expansion, and even an initial public offering (IPO).
|Type Of Investors
|Stage Of Growth
|Angel, friends and family, micro VCs, crowdfunding
|Launch product, recruiting, development of products/services
|$10,000 to $2m
|Accelerators, angel investors, venture capitalists
|Proven business model, core team, development of product, business plan for market expansion
|Venture capitalists, late-stage VCs
|Scaling, increase market share, high-quality team, overtake competitors
|$70-120m being average).
|Late-stage VCs, private equity firms, hedge funds, investment banks
|Continued expansion, IPO consideration, increase market share
Know Why Companies Pursue a Series C Round
For many businesses, Series C is the final piece of the puzzle to guarantee long-term growth. The proceeds from this financing round are used for research, development, acquisitions or entering new markets. Here are some more specific reasons and examples:
Maximize company value to achieve a successful exit
Companies can attract buyers and negotiate a higher sale price by demonstrating a strong growth potential and financial plan. Series C funding can also help companies invest in hiring and retaining top talent who can execute a growth strategy — which is crucial for attracting potential buyers.
For example, in 2013, Twitch, a video platform and community for gamers, secured $20 million in a Series C funding round led by Thrive Capital. Just a year later, Amazon acquired Twitch for $970 million. The Series C funding played a crucial role in driving up the sale price and showing the company’s potential.
Boost valuations before going public on the stock market
Stock valuation aims to work out the intrinsic value of company stock to see the profitability of a business and its future market value. Pre-IPO valuation factors in the number of customers, existing revenue, and past growth.
Radical expansion with new products and markets
Post-Series C funding is a time to explore new product lines to attract more customers or expand the lifetime value.
For example, in 2013, Uber raised $258 million in a Series C funding round led by Google Ventures. It helped the company hire more drivers, develop new features to improve user experience, and expand its ride-hailing services to new cities, particularly in Asia. Today, Uber operates in over 10,500 cities in approximately 72 countries.
Acquisitions of competitors with complementary product lines
A Series C round could help you purchase a company that doubles your market share or provides access to technologies to take your organization to the next level.
Recognize What Signals Readiness
To get Series A, you need a functioning product; to get Series B, you need a leadership team; to get Series C, you need a business. So, as Investopedia puts it: “Companies engaging in Series C funding should have established, strong customer bases, revenue streams, and proven histories of growth.” But let’s get down to the nitty-gritty. To get Series C, companies must:
1. Have a clear and proven path for rapid scaling
Businesses often mix up growth with scaling: Growing means you increase revenue as fast as you add resources while scaling means adding revenue to the company faster than new costs.
2. Be prepared for global expansion in addition to national growth
Series C companies need to establish a trusted global ecosystem.
3. Demonstrate established processes that aren’t dependent on key individuals
In contrast to A or B, Series C can only happen when a company no longer relies on its founders or key members to “win” business or do the heavy lifting.
4. Be legally compliant
In preparation for scaling, companies pursuing Series C funding must comply with vital regulatory bodies and register with the Securities and Exchange Commission (SEC).
5. Maintain a high company valuation
This signals to investors that you have significant growth potential, are well-positioned for long-term success, and are on track to become a major player. In addition, a high company valuation can also attract and retain top talent.
How to Prepare for Series C Funding
Before you begin the Series C funding round, the first step is understanding the current investment climate. Some investors feel that now is the time to invest, as prices have come down and funding rounds are less competitive, meaning time for due diligence and getting to know founders. However, others are contemplating decreasing their check size to double the number of investments, which is terrible news for Series C.
Remember that the current economic climate doesn’t mean you should settle for lower valuations or investors with different ambitions for your business. More than ever, clear questions and setting expectations are vital before approaching the negotiating table.
Next up is finding a lead investor. Check out the leading Series C investors, including Sequoia Capital, Andreessen Horowitz, and Accel. In the Series A round, investors tend to come from more traditional venture capital firms; investors in Series C expect companies to have a business model and proven viability with a well-known product. They could also be concerned with liquidity as your company prepares for acquisition.
So, start with questioning which startups investors are funding right now. To get you started, there are some useful tools out there. But before you delve into your deep research, we can tell you that Andreessen Horowitz has been funding cybersecurity, fintech, blockchain, and gaming, among other industries. At the same time, Sequoia Capital has focused on artificial intelligence and SaaS, investing in companies like Cresta, Remote, and AMP Robotics.
Another thing to consider with venture capital investors at Series C is that they may include non-standard terms in their deals. So, pay attention to terms like Right Of First Refusal (ROFR).
Last but not least, prepare official documents and a term sheet. Companies must work closely with professional accountants to create a structured outline and write the documents. Both parties must sign this contract or mandate in case of any breach of contract.
Prepping for Series C funding may feel like an endless to-do list, but it could be the last turning point your business needs. As your company dramatically evolves and you take on new professional endeavors, you’ll also face unique exposures. Founder Shield specializes in knowing the risks you face at each stage of development and funding, and we work to ensure you have adequate protection.
Want to know more about risk management during Series C funding? Talk to us! Contact us at email@example.com or create an account to get started on a quote.