OBSERVATIONS AND INSIGHTS




Venture Capital Investment Rounds

2021-12-06

VC INVESTMENT ROUNDS

In the Venture Capital (VC) sphere, "rounds" are commonly referred to when speaking about companies and their capital raising in relation to their development stage, and likewise what type of investments a VC-fund does. As a reference for new founders, I've put together a few slides which I hope can give some clarification into the subject.


Typically the rounds refer to the investment rounds a company looks to raise, and the type of investments (or risk acceptance) a VC-investor works with in pursuit of developing high potential investment opportunities into highly-valuable businesses. The rounds themselves relate to the development stage of a company and the goals with the raised investment capital. Each development stage typically has its own set of goals and challenges as a new company sets out to build, launch, establish and scale its business. A way to think of the rounds is to compare them to a stairway, where each upward step equals a higher and more refined (bigger, better, and more established) business that needs to be financed to reach its next step up to the top where the opportunity for a potential IPO is.


What is important to know is that the height of each step on this "stairway" differs in terms of goals, capital requirements, risks, and type of investors. Typically a new business is funded by its founders carrying the risks and financing to transform their idea into a prototype or an early version of their product that they can sell on the market. The longer the founder(s) can finance their works, the better off they are in terms of demonstrating that the product is viable for outside investments and for keeping a larger share in their business. Also, not all companies make it all the way up the stairs from the lowest step to the highest. In fact, very few do, and of those that do, less than 1% make it all the way to ultimately become a Unicorn.


The hurdles going from one round to the next tends to be high, and with a runway of 18-24 months per round, the pressure is high for a company, its management and team to successfully evolve their business to qualify for the next round. This also explains why at the end of the day there are just a few companies that manage to make it past one or two rounds. A business starting at Pre-Seed and Seed-level tends to be a very different one compared to what it needs to be to qualify for B, C and other late stage rounds. Please notice in the graph below that only 30 out of the starting 1 119 companies made it to the 6th Round. Although the 6th round is not the ultimate goal, the graph serves to illustrate how just a few companies successfully make it going from one round to the next.


(Click graph to enlarge | Data source)

Please note that the exactness in the distinctions between the different investment stages, types of investors and growth stages of companies is difficult to pin down as they are in a continual state of change on top of varying between types of companies, products, investors, industries, business models, etc.


I also want to point out some of the more recent trends of seed-creep, "atomization" of Seed-rounds and Agile fund-raising. Valuations and investments are growing (1, 2). What used to be a typical A-round some years ago, is now found in Seed-rounds. Likewise, valuations and investment sizes in B-rounds are now found in A-rounds, and so on. On top of this, Seed-rounds are sometimes split up between not only between Pre-Seed and Seed - but also Seed, Pre-Seed and Second-Seed, what can be referred to as the "atomizing" of rounds (splitting them into smaller sub-round categories). This takes us to what some refer to as Agile fund-raising where in essence companies are in a continual state of raising capital for their business. Less capital, but more often.


The reason why valuations and investments are going up is likely due to increasing competition among VC-investors for identified opportunities (investees) that could become some of tomorrow's Unicorns. But also likely because there is more risk-willing investment capital around for VC-type investments. As for Agile fund-raising, I don't believe in this approach as this, as the name implies, places the company in a continual state of fund-raising for short-term goals as opposed to raising the capital it needs for the next 18-24 months allowing the company to focus on developing its products, value proposition, market, team and processes.


In the forthcoming articles we will look at valuations, specifically of Pre-Seed and Seed valuation where there is not a lot (if any) figures or indications of traction (revenue).

Investment Round Financing Goals.

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Company Development Stage in Relation to Investment Round.

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Type of Investors per Investment Round and Risk Types.

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