Most Angel Investors have limited opportunities to invest in startups before they’re blocked by regulation. From Seed Round to Series F… today I’ll share what each investment round looks like, how much is raised, and who can invest in each. If you’re serious about getting into this style of investing, make sure to read every single word below.
The world of Angel Investing is divided into two groups of investors.
On one side we have Accredited Investors.
These folks typically have many opportunities to invest in private companies and startups but have to meet income, net worth, or other accreditation requirements.
Then you have Non-Accredited Investors…a massive piece of the investing population.
Before the JOBS Act came about, they really just had one chance to invest in startups –– when they went public (IPO).
And by that time, the potential for big returns was greatly reduced.
Regulation Crowdfunding (thanks to the JOBS Act) has paved the way for everyday Angel Investors and the investment opportunities they have access to.
It still takes patience, a little bit of capital, a healthy tolerance for risk, and solid foundational know-how.
Today, I’ll unpack the various investment rounds seen with startup investing, from Seed Round to Series F, and explain who can invest in each.
P.S. Heads up –– In the next few days, I’ll do a presentation on one of our most recent later-stage deals and explain how you can get access.
First, we have the simplest type of funding, pre-seed funding. This is also called “bootstrapping,” and it involves the startup founders scraping together whatever they can to start the company.
This can come from their savings or friends and family. Usually, there is no agreement for equity in the company.
At this stage, the company may be little more than one or two people with an idea and a rough business plan hashed out on a napkin.
Pre-Seed Funding is used by the startup to take the very first steps toward making the founder’s vision a reality.
Unless you personally know the person who is starting the company, you will not have access to invest at this stage.
Next, we have the first real round of funding, Seed Funding.
At this stage, the startup is usually still in the idea stage but often will have a prototype or beta product. The founders are seeking funding to work on things like product development and market research and to hire a founding team.
Sometimes a startup will have a more developed company but needs capital to sustain pre-revenue growth. Seed-stage companies can be pre-launch companies with only a few early adopter customers.
The valuation of a seed-stage company is usually between $3 million and $6 million.
So, who invests during a Seed Round?
Incubators and accelerators commonly invest in and help startup teams at this level and venture capitalists may even take an interest.
But, the most common seed-stage investor is the angel investor. These are investors comfortable with risk and looking for the highest possible returns.
At this stage, it’s common for startups to run Regulation Crowdfunding (Reg CF) campaigns to raise money from angels.
These (Reg CF) campaigns mark one of the few opportunities non-accredited investors have to invest in private companies.
Depending on the startup, Seed Rounds can raise anywhere from $10,000 to $2 million.
Series A Funding
For a startup to garner interest for a Series A round of funding it needs to have a developed track record and a minimum viable product. A startup at this level will have an established user base, consistent revenue figures, or another key performance indicator.
Going into series A, the startup team should have a plan for scaling the company and have a roadmap for long-term profits.
At this stage, a startup is likely trying to raise capital to refine and grow its user base and product offerings.
Startups raising in Series A usually have valuations up to $23 million.
Venture capital firms like to invest at this stage. The risk has gone down a notch but things are still early enough that if the company succeeds the returns will be high.
Accredited angel investors also invest at this stage, but with less influence on the company as they did during the seed stage.
By Series A, most non-accredited investors will be blocked out by regulation.
However, now that the SEC has raised the limit for Regulation Crowdfunding (effective January 2021) rounds from $1 million to $5 million, startups that would have turned to other sources during Series A may now stick with Reg CF.
This gives the non-accredited investor more opportunities in the private market.
Series A rounds typically raise from $2 million to $15 million.
As of late, high-valuation unicorns have pushed this number up, giving us an average Series A round of $15.6 million in 2020.
Series B Funding
By the time a company reaches Series B, it should be past the development stage. These companies have large user bases and have shown that they are prepared to scale rapidly with the large capital injection Series B brings.
The startup will likely spend the capital on advertising, sales, support, technology, and employee costs.
Series B startups can have valuations around $30 million up to around $60 million. The 2020 average valuation for a company at this stage was $58 million.
Many of the same types of investors take part in Series B rounds. Many of the very same firms and individuals from Seed and Series A will reinvest at this point.
By now, the terms are leaning in the favor of venture capitalists. A non-accredited investor will likely have no way to invest at this stage and even accredited ones will find access difficult and terms unattractive.
Series B sees the introduction of new venture capital firms that specialize in investing in later-stage private companies.
The average Series B funding is around $33 million.
Series C Funding
By Series C a company has proven its value and is quite successful. The chances of it going public are now quite high.
A company may want a fresh injection of capital at this stage to expand into new markets, develop new products, or even acquire other companies.
Series C is a common point for a company to end external equity funding and prepare for an IPO.
The average valuation for a company going through Series C funding in 2020 is $118 million. Valuations at this stage are increasingly based on solid data rather than just speculation about future success.
During Series C, we find new types of investors. Institutional investors like private equity firms, hedge funds, and investment banks now take an interest.
Now that the business is stable, thriving, and backed by data, these groups invest large sums of money into it. By now, the valuation is incredibly high, making terms unattractive to investors from earlier rounds.
The average size of a Series C round in June 2020 was $59 million.
Series D, E, F, and Beyond
Startups that come this far are usually looking for one final push to prepare for an IPO.
In other cases, these rounds of funding are known as “down rounds” in which the company is trying to achieve something that it failed to achieve earlier.
These late-stage rounds may simply be a safety net to ensure the company’s long-term success.
Investors in these rounds are generally the same types from Series C or are shareholders who reinvest.
The size of these rounds varies greatly.
IPOs and Publicly-Traded Stocks
The last stop for an investor is at the initial public offering or IPO.
At this point, the company is extremely stable and well established so it goes “public” selling shares for a final big capital injection.
Shares are now available to all, but due to a much lower risk than when the company was private, returns aren’t very high.
At this point, companies aren’t likely to grow rapidly, meaning angel investors and venture capitalists usually aren’t interested in investing.
Early investors that played their cards right should now be selling their shares during this exit. Because they invested when risk was high and the valuation low, these investors get the highest returns.
A Few Things to Consider
- Startups can go straight from Seed funding to IPO, or climb all the way up to Series J before getting there. These are just the general trends of startups in the economic landscape today.
- As a general rule—as the funding rounds progress, the risk goes down, potential returns per dollar invested go down, and ease of access also goes down. The exception to this is the IPO where investment is accessible to all.
- Non-accredited angel investors really only have two chances to invest… during Regulation Crowdfunding rounds or once the company goes public.
- Accredited angel investors can theoretically invest at any stage, but beyond the Seed stage and Series A, access becomes limited. Without being active in the entrepreneurial world or being a member of an angel group, it is unlikely that you will find startups to invest in. Even if you do, the terms can be very unfavorable to only extremely high-net-worth individuals.
- A loophole to investing in private companies is to invest in them indirectly through certain mutual funds, hedge funds, and private equity funds. However, these funds won’t be investing in early-stage companies, most likely they will be investing in Series C and after where risk and returns are much lower.