Series C Funding – A Complete Guide
Series C funding is the fourth stage of capital raising by a startup.
Each series of startup fundraising pertains to different stages of business as the company matures. When a startup raises money, it goes through several stages before reaching its final funding round, known as a “series C round” or “series C funding”. This is the final level of venture capital financing for a firm and the fourth stage of startup funding. On the other hand, some firms prefer to go through additional rounds, such as series D, E, and so on.
Understand Series C funding
Series C funding is the fourth stage of capital raising by a startup. Companies that go to this round of investments already have proof of their success and a high valuation. At the time, the businesses were “young mature” whose owners had already convinced venture capital firms or other institutional investors. Founders are considered to have a viable business, and the investors are generally encouraged about its long-term odds of success.
While previous rounds of funding use investment money to start making money and carve out their space in the market, it is assumed that Series C funding funnels large amounts of cash into profitable businesses to scale them up and get a quick return for the investors. Series C funding aims to prepare a company to be acquired, go public on the stock market, or undergo significant expansion.
How does Series C funding work?
Preferential shares are used to raise funds in Series C funding, just as they were in the prior funding rounds. The shares are meant to be convertible. Holders will be able to convert them into shares in the company at a later date. To clarify, companies that are looking to raise money through a series C round are no longer startups. They are often well-established and profitable businesses in their last stages of development. A large customer base is drawn to their core products or services because of the high demand they generate.
Companies seek series C financing for further expansion to reinforce their existing success. Following a series C round, the company aims to scale its operations and grow. The proceeds from this financing round are most commonly used to enter new markets, research, development, or acquisitions of other companies.
Who provides Series C Funding?
There are several firms that offer Series C Funding, most notable ones are venture capital investors, private equity firms and investment banks. Investors might be looking for a few key things when startups reach this stage in their business. We explain more about them below:
- Venture Capital Investors – Venture Capital funds invest in early-stage startups that are at an embryonic stage through seed capital. Venture capitalists may battle with management during this round of fundraising. Many venture capital investors, however, are more than just financial backers. As a result, they have strategic directives that focus on things like enhancing a company’s market presence and increasing its financial and operational efficiency.
- Private Equity Firms – Private equity firms are an alternate mode of private financing, composed of funds and investors that directly invest in startups. One of the most important things to keep an eye on is how much ownership a company might lose with private equity firms. It’s not uncommon for private equity firms to demand a considerably bigger percentage of a company’s equity in exchange for more money. Many of these companies demand majority ownership in the company, leaving you with an enormous profit loss.
- Investment Banks – An investment bank advises the startup when it matures and sets to go public through an initial public offer (IPO). While a bank loan allows you to retain control of your firm, there are several factors to consider. Starting with high-interest bank loans. Given this and the fact that many banks don’t lend enough money to satisfy the company’s needs, meeting your expansion ambitions can be challenging. Another factor to consider with banks is qualification. Important to have a solid track record or at least respectable collateral. Companies may also be required to submit personal guarantees in order to obtain money. In the event of a business failure, your assets may be taken.
Why is Series C Funding Important?
As evident from the discussion, series C funding is more strategic and operational where funds are raised to study a new market, develop a new product or service or analyze consumer behavior, a few more essential places for series C funding includes:
- Long-term Growth – Although it is not the last stage, the Series C funding is the final missing puzzle piece. Successfully raising Series C funding means investors are convinced that the startup will continue to achieve long-term growth.
- Radical and Large Expansion – Series C funding caters to startups that want to undergo significant expansion and growth. It involves acquiring one or more businesses and entering a new target market for expansion. The founder can launch a new product or service in the international market in terms of expansion. A higher level of expansion requires more consistent and extensive fundraising.
- Established Status and Valuation – It is estimated that a startup needs a valuation of $118 million to enter this fundraising stage. But most firms that undergo Series C funding have three or four times higher valuation than $118 million. Essentially, this stage of the funding round turns into a less risky investment for investors. At this point, startups can get offers from hedge funds, banks, private equity firms, and other financial institutions.
Which companies primarily receive series C funding?
Because Series C companies are no longer considered startups, this round of capital is distinct from other funding rounds. As a result, the startup continues to grow at an accelerating pace. However, it is not uncommon for companies in their third round of funding to focus on expanding their workforce in order to keep up with demand.
For instance, a startup may need to expand its HR department, or the startup may find that the business requires new hires as the demand for new product development.
Startups that have reached this funding round are doing incredibly well and are ready to expand to new markets, develop new products, or acquire other businesses. Startups at this stage may also be interested in reaching international markets and increasing their valuation before an acquisition or Initial Public Offering.
Companies at the Series C funding stage of their business are thinking a lot more strategically and about their long-term goals.
How to raise series C funding?
Series C capital is used to prepare a firm for sale, IPO, or significant expansion. It is usually the final step of a startup’s fundraising, though some companies do further rounds. The founding and the core team of the startup venture must consider the legal compliance and must also adhere to sovereign government rules and regulations in the jurisdiction the startup is based on to raise funding. Follow these steps to raise Series C funding for your startup.
1. Find a leader investor
Finding out who is investing in your industry’s start-ups will give you a better idea of the kinds of contacts you should be making. Analyze which startup investors are most active and what types of ideas they are funding. While some venture capitalists are open to working with any firm that comes their way, others prefer to focus their efforts on a certain industry and use their connections there to their advantage. The following are some of the most prominent Series C investors:
- Google Ventures
- IDG Capital
- Sequoia Capital
- New Enterprise Associates
- General Catalyst Partners
- Kleiner Perkins Caufield and Byers
2. Prepare term sheet
A term sheet can be understood as a contract between the startup founder and the investor. The only noticeable difference is that it is usually non-binding. This contract later serves as the legal document to which both parties have fully agreed to a final investment.
Additionally, a term sheet can be understood as a financial model and the guidelines laid down to protect and act in each party’s best interest involved in the transaction.
3. Include pro-rata rights in a term sheet
Pro-rata right is a legal term that describes the right, but not the obligation, that can authorize an investor to maintain their initial level of percentage ownership in a company during subsequent financing rounds.
4. Prepare official documents
For a funding deal to materialize, each party signs a contract or a mandate that acts as an official document in case of any breach of contract terms.
Usually, preparing official and legal documents is the work of advocates and the accounting or some expert in the matter but knowing hooks and crooks are always beneficial for the founders. Also, the professionals processing such official documents must be trustworthy. Basic knowledge of official documents eliminates the risk of being cheated.
- Planning Document – Plan your document while getting things finalized. The official document’s purpose, style, tone, and sentence length should be pre-decided.
- Research and Brainstorming – Once the plan is ready, terms must be brainstormed and well researched by the team.
- Outlining the Structure of Document – Outline the documents with the context of topics, such as business plan, research proposal, etc.
- Writing Document – Official documents must be written by a matter expert and cross-checked the points discussed.
5. Consider vesting schedule
Full rights cannot be revoked by another person, which is why vesting is so important. To begin with, each founding member of the company receives an equal share of the company’s stock under the terms of the founders’ equity. For the founders, it encourages them to take further risks.
Example of Series C Funding
When a company needs Series-C capital, it means it is well-established, profitable, and has a sizable market share. The company’s life cycle is illustrated graphically that, in general, business declines after a high point is reached. An acquisition or expansion of a product or service is required to re-enter the expansion stage.
Hedge funds, investment banks, and private equity firms are common contributors to Series-C financing. Several hundred-million-dollar businesses exist. Businesses tend to raise more than $50 million in the capital at this stage.
At this point, ‘Magic Leap’ had raised more than $1 billion. Uniphore Pvt. Ltd. got roughly 4 million dollars in Series-C fundraising in July 2019 from March Capital Partners in India. This means that even small businesses can access Series C money because there are no strict guidelines for using it or how much it should be.
Challenges of Raising Series C
In many cases, a startup’s success or failure hinges on its ability to get Series C capital. A firm grasp of the nature and operation of this kind of investing is crucial before proceeding in that direction. To make an informed choice, below are a few potential difficulties that may arise while seeking series C funding.
- Ensuring investor alignment – Founders of new businesses who are desperate for funding may compromise the company’s future success if they make hasty assumptions about the motivations of potential investors. Investors in a startup could be interested in the company because of the potential financial rewards, the compelling story, or the strong team. Yet, conflicts emerge when investors’ goals and startups’ are at odds. As a result of a lack of harmony, business owners and financiers end up paddling in opposite directions. As a startup’s founder, it is your responsibility to ensure that your investors’ interests align with your company’s.
- Having a solid customer retention – Successful firms often have a large number of satisfied clients. Your company’s rapid double- or triple-digit growth rate has plateaued. Because of these factors, it is critical to demonstrate high customer retention while maintaining low churn rates. Both show that your current clientele loves what you’re selling and that you can expand your business by offering newer products and services to those happy customers.
- Exploring product development into new verticals – You’ve finished developing your products and, likely, shipped numerous subsequent upgrades and variants. Prospective Series C investors will now want to know what comes next. They are interested in learning about the potential for increased sales from entirely new goods that your current and future consumers find helpful. Investing in the research and development area may become necessary to bring in innovative product categories.
- Preparing exit plans – The Series C round of funding is often the last one a firm seeks. This is because the size of subsequent rounds typically makes them unfeasible for individual investors to finance. Investors in a Series C round will likely be considering the company’s IPO prospects. They will also be interested in hearing about your company’s intentions to boost its value in the lead-up to its initial public offering. Drafting your strategies for acquiring rivals or comparable firms is also a possible option.
FAQs on Series C Funding
To give more understanding on Series C Funding, we have gathered the most asked questions on this funding round and provided answers to help budding new businesses to go through the Series C Funding process.
How can companies prepare for Series C funding?
Entrepreneurs seeking Series C investment should regard the process as a personal sales pitch and a sales pitch for their firm. So, to achieve the best possible conditions, they must be capable of negotiating from a firm standpoint with investors.
How does Series C funding differ from other types of financing?
Series C funding rounds are when investors pour money into a company’s core in the hopes of making multiples of their initial investment. The company’s Series C fundraising aims to help it scale or expand rapidly and profitably. Acquiring a competing firm is one strategy for growing a business’s operations.
How do investors decide how much to invest in a Series C round?
Investors will be interested in hearing about the potential for growth in sales from completely new goods that existing customers have shown interest in. This might imply expanding your product’s reach into new market niches or verticals. These analyses will help them settle on a target investment sum.
What are the most common mistakes startups make when raising a Series C?
During series C funding, common mistakes made by founders include failing to define and prioritize the company’s goals, underestimating the amount of capital required, failing to recognize the significance of timing, failing to identify the company’s lead investor, and failing to have a diversified group of investors.
What are the next steps after successfully raising Series C?
The investment for a firm’s Series C round is often the final round that the company will seek, while some businesses do proceed to obtain funds for Series D and E rounds and even further. After securing Series C financing, many firms go public with an IPO.
How much time does it take from series C funding to the IPO stage?
Putting it in the real world, the time from Series C funding to IPO is not definitive or pre-decided by any institution or government. Analyzing the startups that raised funds by IPO shows that it usually takes 4 to 9 years to reach the stage of IPO from Series C. Also, IPO lies in the table of government institutions after application for IPO by startups.
Need a business valuation to get funding for your company?
When a startup venture decides to raise series funding, term sheet, financial model, mandate, and pitch book become complex to understand and follow diligently. If the founding team does not have experience in finance and legal compliance, it becomes a challenge. Eqvista can help a business and a startup venture sign the mandate, raise the desired and adequate round of funding, and get a correct market valuation once the startup venture matures and decides to go public. To learn more about our business valuation services, contact us today and we will be happy to offer you a free consultation.