Is Series C funding bad?
Series C Funding is More Secure
That's because Series C funding comes from venture capitalists who have already invested in your company and seen it grow. They're more likely to continue investing in your company because they believe in its long-term potential.
Regulatory Compliance Risks
When a company raises funding through a Series C round, it means they are at a rapid growth and expansion stage. But with this success comes an increased level of complexity in the company's operations, which can lead to more regulatory compliance issues.
| Series | Failure rate |
|---|---|
| Pre-Seed/Series A | 60% |
| Series B | 35% |
| Series C | 1% |
Series C
The company is even less risky at this stage, so equity grants are typically lower than they were at the Series B stage. Equity grants for Series C startups typically range from 0.25-1% of the company's fully diluted ownership.
Businesses that raise Series C funding are already quite successful. These companies look for additional funding to help them develop new products, expand into new markets, or even acquire other companies.
A Series C funding amount is generally between $30 and $100M settling on an average round of $50M. At this point, a startup's valuation is likely over $100M and they are on a national radar looking to expand internationally.
If you join a startup early (seed to Series C), you're taking on a venture capital level of risk—with the potential for venture capital-level rewards. If you join from Series D and beyond, you're closer to a growth investor than a venture capitalist.
Strictly speaking, companies that aim to obtain series C funding are no longer startups. They are usually established, successful companies in their late stages of development, with solid revenues and profits.
Series C funding has the goal of preparing a company to be acquired, go public on the stock market or undergo significant expansion, possibly through acquisition. It's usually the last stage of fundraising a startup goes through, although some businesses pursue additional rounds to raise more capital.
The failure rate of startups in the series B stage is estimated to be between 20-30%, while the failure rate of startups in the series C stage is estimated to be between 5-10%. The failure rate of unicorns is estimated to be between 1-2%.
Do VCS invest in Series C?
Series C funding typically comes from venture capital firms that invest in late-stage startups, private equity firms, banks, and even hedge funds. This is the point in the startup lifecycle where major financial institutions may choose to get involved, as the company and product are proven.
About 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.
However, he says 0.5 percent and 1 percent is a good range to consider, vested over one to two years. For that amount, he suggests you can expect about two to five hours per month of involvement from your advisor. “Factors include the type of company (and perceived potential value of the equity),” Kris writes.
According to a common rule of thumb, early employees of a startup should receive between 1-5% of the company's equity, depending on their level of experience and role in the organization. However, it is essential to understand that equity is just one part of a comprehensive compensation package.
Startup financial advisor David Ehrenberg suggests that 5 to 10 percent is a fair equity stake for CEOs who join the company later. Research by SaaStr backs up this suggestion. The average founder/CEO holds roughly 14 percent equity at the company's IPO, while an outside CEO holds an average of 6 to 8 percent.
Once you get to Series C funding, your investor range broadens. You can expect hedge funds, private equity firms, and investment banks to get involved in this round of funding. You have revenue (usually net), growth, a huge customer base, and a kick-butt team. Thus, your valuation will be tied to more concrete data.
Analyzing the startups that raised funds by IPO shows that it usually takes 4 to 9 years to reach the stage of IPO from Series C.
The Series C Preferred Stock has preference over the firm's common stock for the payment of dividends. Any dividends declared on the preferred stock will be payable quarterly in arrears.
| Group | Pre-Series Seed | Post Series B |
|---|---|---|
| Founders | 100% | 15% |
| Series Seed Investors | – | 25% |
| Series A Investors | – | 25% |
| Series B Investors | – | 25% |
All things being equal, though, a typical seed round valuation for a pre-revenue startup is between $5 million and $10 million. For a revenue-generating startup, the typical valuation range is between $10 million and $20 million. Of course, these are just general ranges and there are always exceptions.
What is the average seed round valuation in 2023?
However, median seed round sizes slightly increased from $2.61M Q3 of 2022 to $3M in Q3 2023. Pre-money valuations have also slightly increased from $10.5M to $12M. Seed investors are focused on capital efficiency and unit economics, looking for startups that can bootstrap growth.
Again our data shows that the typical Series A CEO is pay is about $180,000 to $190,000 per year. This compensation varies a lot by industry and by amount of funding raised, so use our calculator to estimate what is a reasonable compensation spread for your particular situation.
Investors generally prefer C corporations.
If you plan to raise money from investors, then a C corporation is probably a better choice than an S corporation. Your investors may not want to invest in an S corporation because they may not want to receive a Form K-1 and be taxed on their share of the company's income.
Traditionally, Series C has marked the exit phase of a startup's lifecycle. It's when you start down the path to profitability and begin to plan a potential IPO. For many, it will be the last round of funding they go through.
This can be good for shareholders, as they will be able to buy shares at a discount. However, it can also be bad for the company, as it can limit the amount of money raised and hamper growth. The implications of a series D valuation on the stock price are, therefore, both positive and negative.
