Posted on January 4, 2013 @ 09:45:00 AM by Paul Meagher
A couple of terms you might come across when searching for startup business capital are "Seed Money" and "Series A financing". Most entrepreneurs using this site to fund their startup will be looking for seed money. Generally after you have exhausted your credit line and tapped out any friends or family that might be willing to help out, you will seek out an angel investor or business investor for additional startup capital. The money these investors supply is called "Seed Money". Seed money is subject to a higher risk because often the business model is not proven or is not generating much revenue yet. The investor will generally be looking for ownership in the company in return for capital.
In the textbook account of startup funding, the next round of funding after the Seed Money round would be called Series A financing round. This round of funding involves larger amounts of money and generally involves venture capital organizations putting up the money. In this round of funding, the legal complexity of the contracts generally goes up and the level of scrutiny and involvement by the venture capital company also goes up. In this round of funding, the percentage of ownership you might have to sacrifice might be about the same as you sacrificed during the Seed Money round, but you will be asking for more money in the Series A financing round owing to the fact that there is less risk involved now and the business model might be starting to generate revenues.
If further rounds of funding are required, then those rounds will be called Series B, C, D, etc.... The letter lets the investor know where they fit in the hierarchy of company investors. If you intend to engage in multiple rounds of financing, then the worry for an investor is that their share of the company profits will be too small to make it worth their while investing in the company. Forward looking entrepreneurs will anticipate this dilution issue and will refrain from giving away too much of the company in the earlier rounds so that there is some left for later rounds of investment.
Image Source: http://en.wikipedia.org/wiki/File:Startup_financing_cycle.svg
We are talking here about rounds of investment that might required to turn a small company with a good idea into a large company with a profitable business model. These are not the only companies small business investors are interested in. Small business investors are also very interested in funding existing businesses that require capital to expand their business.