How to Create the Next Facebook: Seeing Your Startup Through, From Idea to IPO by Tom Taulli Page A
Authors: Tom Taulli
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Because unless your startup starts showing breakout momentum, your VC will probably have little or no time to devote to your venture. Furthermore, collecting early-stage venture capital funding could potentially make it more difficult for your company to raise investments during the Series A round of financing (which I discuss in the next section). How so? If your company’s original VC passes on the opportunity to infuse follow-up funding into your venture during a Series A round of financing, other firms could read your VC’s disinclination to invest as a sign of its lack of confidence in your venture. It’s even worse if your original VC is a tier 1 firm and it provided your company with a decent amount of seed funding, such as $500,000 or more. True, maybe your VC is passing on the opportunity to invest in your company via Series A financing because it has already made major financial commitments to other companies, butprospective Series A investors won’t necessarily know the true motivation behind your VC’s decision to pass.
Venture Rounds
Generally speaking, founders seek out venture rounds of financing to evolve their product and to start building their company’s infrastructure, which entails hiring engineers and perhaps business development people. As discussed briefly in the previous section, the first round of venture financing a founder pursues is referred to as a Series A round .
The total amount of financing a startup raises during a Series A round can range from $1 million to $25 million or more, but the typical amount is around $5 million to $10 million. To raise so much capital, fledgling companies generally select one lead VC whose purpose is to facilitate the financing process and bring other VCs into the round to distribute the overall risk of the investment among several parties. Keep in mind, however, superangels may also be involved in a company’s Series A financing efforts. In Facebook’s case, for example, Accel Partners was the only VC involved in the company’s $12 million Series A round of financing in May 2005. Angel investors Marc Pincus and Reid Hoffman also participated in the round.
The Series A funding round typically lasts for a year or so. If it looks like the company will achieve longer term profitability at the conclusion of this financing process, then the company will launch a Series B round of financing to provide fuel for its growth. At this point in time, the company will probably also start exploring expansion into global markets and may bring on even more professional management to help take the venture to the next level. In some cases, the company may even acquire other ventures to help bolster its growth.
During a Series B round, a company may raise $50 million or more in financing from investors who, again, are usually VCs but may also include strategic investors. (Facebook, for example, raised $27 million from investors [including Greylock Partners, Meritech Capital Partners, and The Founders Fund] during its Series B round of financing in April 2006.) Then, when a company reaches the Series C level of financing, its investments often trickle in from several large investors over the course of several months. Typically, a startup continues raising funds in this manner via subsequent venture rounds until it is ready to go public. Or, if an IPO is not a viable option—perhaps because the market opportunity proves to be less than expected—a company may instead look to sell the company to a larger operator. This latter option, however, is not as attractive, because the returns on a company sale are generally less than they are on an IPO.
IPO Funding
When a company is ready to issue shares to the public, it undergoes a process known as an initial public offering , or IPO , and its shares are made available to the trading public via a major stock exchange, such as the NYSE or NASDAQ. Many tech companies raise upward of $100 million to $200 million during their IPOs.
Venture Rounds
Generally speaking, founders seek out venture rounds of financing to evolve their product and to start building their company’s infrastructure, which entails hiring engineers and perhaps business development people. As discussed briefly in the previous section, the first round of venture financing a founder pursues is referred to as a Series A round .
The total amount of financing a startup raises during a Series A round can range from $1 million to $25 million or more, but the typical amount is around $5 million to $10 million. To raise so much capital, fledgling companies generally select one lead VC whose purpose is to facilitate the financing process and bring other VCs into the round to distribute the overall risk of the investment among several parties. Keep in mind, however, superangels may also be involved in a company’s Series A financing efforts. In Facebook’s case, for example, Accel Partners was the only VC involved in the company’s $12 million Series A round of financing in May 2005. Angel investors Marc Pincus and Reid Hoffman also participated in the round.
The Series A funding round typically lasts for a year or so. If it looks like the company will achieve longer term profitability at the conclusion of this financing process, then the company will launch a Series B round of financing to provide fuel for its growth. At this point in time, the company will probably also start exploring expansion into global markets and may bring on even more professional management to help take the venture to the next level. In some cases, the company may even acquire other ventures to help bolster its growth.
During a Series B round, a company may raise $50 million or more in financing from investors who, again, are usually VCs but may also include strategic investors. (Facebook, for example, raised $27 million from investors [including Greylock Partners, Meritech Capital Partners, and The Founders Fund] during its Series B round of financing in April 2006.) Then, when a company reaches the Series C level of financing, its investments often trickle in from several large investors over the course of several months. Typically, a startup continues raising funds in this manner via subsequent venture rounds until it is ready to go public. Or, if an IPO is not a viable option—perhaps because the market opportunity proves to be less than expected—a company may instead look to sell the company to a larger operator. This latter option, however, is not as attractive, because the returns on a company sale are generally less than they are on an IPO.
IPO Funding
When a company is ready to issue shares to the public, it undergoes a process known as an initial public offering , or IPO , and its shares are made available to the trading public via a major stock exchange, such as the NYSE or NASDAQ. Many tech companies raise upward of $100 million to $200 million during their IPOs.
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