Series C Financing

In the previous articles, we have already learned that businesses do not raise all the funds that they need to build their business at an early stage. Instead, they develop a series of milestones that chart the path of the startup firm.

At each stage, enough funds are raised to enable the firm to reach the next milestone. This is because, at each stage, the perceived risk reduces, and as a result, investors are willing to pay a higher valuation for the firm. Hence, entrepreneurs can obtain more funding using this process whereas investors can reduce their risk at the same time.

Now, we already know that the purpose of seed funding is to help the founder create a prototype. Once the prototype is ready, Series A funding is used to create the actual product and get a team in place. After that Series B funding is used to ensure that the product or service is able to obtain a significant market share. In this article, we will look at what Series C funding is and how it is used by startup founders.

What is “Series C” Funding?

Series C funding can be considered to be the last round of funding in the journey of a startup from an idea to a fully functional corporation. Sometimes startups do raise Series D and E funding as well. However, as per the standard process, Series C fundraising is the last stage of the process.

Series C funding is generally used by companies in order to facilitate an exit for other investors. This generally means that series C funding is utilized by companies in order to get themselves ready for a potential merger or acquisition. Alternatively, they could use the funds to get ready for an initial public offering.

“Series C” funding is generally sought after by companies that have become extremely successful in their business. These companies are growing at such a rapid pace that the cash flow generated from the business, the borrowing capacity of the business as well as the deep pockets of the investors are unable to provide enough capital to the firm. It is also possible that the company does not want to be acquired. Instead, it may want to use the funds raised to make a leveraged buyout i.e. acquire a firm much bigger than them. Alternatively, the firm could use the funds to explore new lines of business or new markets.

The important point to note is that Series C funds are seldom used in the day-to-day functioning of the firm. Instead, the purpose of Series C funds is to facilitate inorganic growth and provide the existing shareholders with an exit opportunity.

It is important to realize that at this point, the startup cannot really be categorized as a startup. Instead, it is growing at a rapid pace and is almost functioning like a full-fledged corporation.

Facts About Series C Funding

  • The time difference between Series B funding and Series C funding tends to be quite large. This is because Series C funding is required to undertake strategic initiatives. The firm only undertakes strategic initiatives after it has achieved complete control over its day-to-day operations. Hence, it is common for firms to approach Series C funding three to four years after they received their Series B funding

  • Many early investors in the business want to cash out on their investment when the business has become successful. This is because venture capital funds have a time horizon after which they are obligated to return the funds to the people who contributed to it. Investors who invest in Series C funding tend to assign a very high value to the firm. Hence, it provides a significant markup to people who invested at the earlier stages.

  • In most cases, founders do not dilute their holding of the firm during Series C financing rounds. This is because if they issue even more shares and dilute their holdings further, then they stand to lose control over the firm. In most cases, new shares are not issued in Series C funding rounds. Instead, ownership of already existing shares tends to change hands in this round

  • Companies that raise Series C funding generally have multiple investors. All of these investors tend to be big investment banking or private equity firms. It can be challenging for a startup firm to ensure that all investors remain on the same page.

    It is common for investors to struggle for control of the firm. Such infighting can be detrimental to the future of the firm and should be curtailed at the earliest. Hence, managing the expectations of various stakeholders and ensuring that an amicable atmosphere is maintained is one of the biggest responsibilities of startup founders at this stage.

  • In earlier rounds of funding, startup companies tend to issue preference shares. These preference shares provide certain additional rights to the investors. However, when it comes to Series C funding, the company is comfortable issuing regular equity shares.

    Even if preference shares have to be issued, these shares are convertible and will be converted to equity shares at a later date.

The bottom line is that “Series C” financing is the last stage of financing for most companies. Some companies do undergo more rounds of financing but that is not the case for the vast majority.

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Startup Finance