What is venture capital, and what are funding rounds (seed, Series A)?
Short answer
Venture capital is money invested in young, high-growth companies in exchange for equity. Startups raise it in stages called funding rounds, usually seed, then Series A, B and later, each at a higher valuation if things go well.
How venture capital works
A venture capital (VC) firm raises a fund from limited partners such as pension funds, endowments and wealthy individuals, then its general partners invest that money in startups. The firm takes shares in each company and aims to profit when the company is sold or goes public. Most startups funded this way fail or return little, so VC depends on a few large successes.
The stages
Names and sizes are conventions, not rules, and they shift over time and between countries.
| Round | Usual purpose |
|---|---|
| Pre-seed / angel | Prove the idea; first prototype; founders, friends, angels |
| Seed | Build the product and find early customers |
| Series A | Show repeatable growth and build the team |
| Series B, C and later | Scale operations, enter new markets, or acquire |
| Growth / pre-IPO | Prepare for a listing, acquisition or large expansion |
Valuation and dilution
The pre-money valuation is the company’s value before new money comes in; adding the investment gives the post-money valuation. The investor’s share is the investment divided by the post-money valuation. Illustrative arithmetic: 2 million invested at an 8 million pre-money valuation makes the post-money value 10 million and the investor’s stake 20%. Existing holders are diluted by the new shares.
Money may be raised through priced equity, convertible notes or SAFEs (simple agreements for future equity), which convert into shares at a later round.
Post-money = pre-money + investment
Investor stake = investment / post-money