September 25, 2020

SB-Accounting

Accounting + Finance Blog

Understanding Venture Capital financing rounds

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Financing startup companies usually come in stages from venture capitalists. VCs investments are time consuming and expensive process. To cut down the stages involved, various financing rounds is the usual practice. Therefore, a finance round can cut across more than one stage.

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What is the financing round?

It is an investment fundraised by venture capitalists or angel investors for a startup at a point in time.

It can also be defined as finance raised by investors through VC to help startups meet a particular milestone.

Key Explanations

From the definitions, a finance round occurs at a point in time to fund a startup.

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Each time funds are raised, it is referred to as a funding round. The finance rounds are usually represented with a combination of progressions and letters.

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There can be seed rounds, Series A rounds, Series B, Series C and Series D. At times, there can be Series AA. This occurs when a business is going through another set of funding rounds. It resulted from the fact that the previous funding rounds do not lead to any reasonable result.

Each funding round is a private equity fund. Therefore, they are translated as share capital of the startup company. Most times it is provided to the company as preference shares.

The final round can be stated as ordinary shares. After the final round, the company may issue its first Initial Public Offering (IPO). It is through IPO that the venture capital firm and other investors involved in the financing rounds can recoup their investments.

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The financing rounds can cut across various stages of VCs financing. The Series A round maybe for the seed and early-stage financing. While the Series B round may combine Early and expansion stage financing.

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In another dimension, the investment rounds may be for a single stage. Series A, B and C may be provided to finance the Early stage of the startup such as providing cash flow that will help the entity to break even.

The reason for this is to reduce the costly and time-consuming processes of the various funding stages.

The financing rounds are provided when the company has crossed a particular milestone. The Series C and D round, for example, is provided when the company has stood its ground on its first location and intended to expand to other regions.

Funding rounds help to provide investments to startups through VCs. However, the financing rounds should never be confused with the stages in venture capital financing.

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