Skip to content
September 22, 2010 / Danny Robinson

Funding Round Nomenclature Reconciliation – Series A or Seed?

Over the past few years, the way we describe funds and funding rounds has become a bit ambiguous.  I believe that this has been caused by what Fred Wilson calls Two Venture Capital Industries diverging from each other.  In my opinion, most miscommunications can be avoided if we just use the same words to describe things.  I really don’t care what the words are, as long as we can all agree on the meaning.

Specifically, I’d like to focus on the word “Series” as a way to define a round of financing. Depending on who you talk to this word is way “overloaded.”  Some funds use it to describe the size of their fund, while other investors may use it to define a range of how much they invest in each company and lawyers use it to define a class of stock.  For instance, when I purchase shares in a company, I’m usually purchasing shares in successive “series” of rounds; Each round defined using the next subsequent letter in the alphabet.  So, if an angel purchases $50k worth of equity in a startup, the equity is usually labeled “Series A Preferred Shares” and the next round the angel invests would be labeled “Series B Preferred Shares.”  Despite that the proper definition of the term “Series” is a legal definition of a round of stock, everyone else would consider the angel’s $50K investment a “seed” round and the following investment, the company’s “A” round.  Culturally, “Series” is used to describe the *stage* of company that a fund invests in, which I think trumps the legal definition.As you’ve heard over and over, Internet companies are more capital efficient

As you’ve heard over and over, Internet companies are more capital efficient then they were five years ago, goldeneaglecoin.com says, this is the fundamental cause of this ambiguity. I believe that the name of each stage (Seed, Series A/B/C/D, Mezz, PE, IPO etc.) should be a function of the risk associated with the investment.  For example: If I grow my company organically for 2 years, and it’s now generating revenues of $10M/year, then the first money I take will probably be from “Series B Investors.” It’s a function of price and risk tolerance.   Keeping all these things in mind, here’s what I propose the rough definitions of the stages should be for Internet investing:

  • Seed – Test an idea with the market; See if it sticks. Angels, Super-Angels, Seed Accelerators usually invest $10k-$100k in lots of deals, which means lots of failed tests, but an increasingly higher hit rate at the same time.  If technology and user risk (ie: can they build it and do people want it?) is eliminated, then the company qualifies for the next level.
  • Series A – Invest in successfully tested ideas from the seed stage, pressure-test the previously identified user acquisition channels, and refine the user experience. Today, series A investors typically invest $250k-$2m.  If market risk (ie: can you grow it?) is eliminated, then they qualify for the next level.
  • Series B+ – Once the site/app is built, customers are using it, revenues are flowing, user acquisition channels have been quantified, it’s time to put the pedal to the medal and grow!  This requires capital, but selling equity may not be the founders first choice if they have other options.
  • Factoring – Banks love to lend money to companies based on receivables.  The smartest companies I know borrow as much as they can against these uncollected sales contracts in order to put as much money to work as quickly as they can.
  • Private Equity – You might want to acquire another company, or buy equity held by an exiting management team. (Note: There are lots of reasons why you might raise money from a PE firm, but not the scope of this post)
  • IPO – A lot of CEOs forget that an IPO is a way to raise money.  Obviously, it provides liquidation for their stock, but if that’s the only thing that you’re after, there are other ways to achieve it.

I was debating this with a colleague of mine today, and his argument was that there’s a an entire “culture” built around the term, and to just accept that it’s flawed. – Maybe I should, but hopefully at least we’ll be talking the same language.

Advertisements

11 Comments

  1. ahmed49 / Jan 1 2011 8:38 pm

    Specifically, I

  2. Dave5 / Jan 1 2011 8:54 pm

    Specifically, I

  3. stone72 / Jan 2 2011 3:44 pm

    Specifically, I

  4. Presonus HP60 / May 27 2011 11:05 pm

    Salve. I just want to declare that what you give us here is really very good sharing so I have post http://blog.bootuplabs.com/2010/09/22/funding-round-nomenclature-reconciliation-series-a-or-seed on my Facebook profile so all can have the freedom to enjoy. I was glad when I saw this tittle, Funding Round Nomenclature Reconciliation – Series A or Seed? | Bootup Labs Blog, on google search, and i was so becouse at last I found what I was looking for. My regrds

  5. Mysore City / Jun 2 2011 11:07 pm

    It’s appropriate time to make some plans for the future and it’s time to be happy. I’ve read this post and if I could I desire to suggest you some interesting things or advice. Perhaps you could write next articles referring to this article. I wish to read even more things about it!

  6. Julian Robertson / Apr 19 2012 12:06 pm

    Soros should shut up and focus on managing his money again. Last year his fund lost 15%.

  7. garden parasol sale / May 9 2012 8:40 pm

    Crowd funding or crowdfunding (alternately crowd financing, equity crowdfunding, or hyper funding) describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations.

  8. bow ties for men / May 16 2012 7:38 pm

    Seeds have been an important development in the reproduction and spread of flowering plants, relative to more primitive plants such as mosses, ferns and liverworts, which do not have seeds and use other means to propagate themselves. This can be seen by the success of seed plants in dominating biological niches on land, from forests to grasslands both in hot and cold climates.

  9. hustler mowers / Jun 20 2012 7:13 am

    I have bookmarked it and I am looking forward to reading new articles. Keep up the good work!

  10. Visit website / Jul 19 2012 1:34 am

    In thought I wish to put in writing like this additionally ?taking time and precise effort to make a very good article?but what can I say?I procrastinate a lot and on no account appear to get one thing done

  11. office clothes for women / May 27 2014 2:49 am

    You will have to create your portfolio simple as well as effective;
    there is no need to spend much money on it. I’ve noticed
    there is a trend emerging that is helping women to embrace
    their bodies, their curves. Some online stores offer
    frequent buyer deals and exclusive discounts.

Comments are closed.

%d bloggers like this: