David Wu, General Partner at Maveron explains the different stages of startup funding from when you raise money from people you know, people you don’t know and people who invest professionally.
David led Maveron’s investments in August Home, Darby Smart, Eargo, Instamotor, and Booster Fuels and serves on each company’s board. David appreciates what it’s like to be in the shoes of innovators —and you’ll often find him coaching entrepreneurs at top Bay Area incubators such as Y Combinator, AngelPad, 500 Startups, and Stanford’s StartX.
Transcript:
What are the different stages of startup funding?
When I think about the different stages of startup funding, there are a lot of different named stages, seed all the way through series A, series B, series C, but the lines are really blurring in terms of what each of these stages really means. When I talk to entrepreneurs I often think of three distinct stages in my mind. The first stage is when you can raise money from people you know and that’s often called seed or angel, and that’s really when you go out and you’re selling your past accomplishments to friends and family and people that have a relationship with you and are willing to give you money on your dream.
The next stage, and there’s a big line in the sand from when you go from being able to raise money from people you know to people that have not met you before. And then they’re basing it not just on a relationship but on the progress and the opportunity in front of that. And so I think, generally, when you can raise money from one person you don’t know, you can raise money from several people you don’t know, there’s a real tipping point there.
Then the third stage is when you’re raising money not just from people that you haven’t met before, maybe angels and maybe seed funds, but you’re raising money from people that are doing this professionally. These are people that not on a wind decide to invest in your company but people that day in and day out are making it their job to invest other people’s money to make money. I kind of think of those as the three stages: first from people you know, then from people, you don’t know and then from people who are professional investors.
So the seed fund is roughly when you’re taking money, the first time you’re taking money from people you don’t really know and it’s kind of extension of the friends and family around and you’re going out with a story and looking for product market fit. Often you have a thesis about a behavior or something is going on out there, and solution to a problem and you’re telling a story and raising money to get that in the hands of actual people to try it out and see if you can find some early product market fit. The series A round is kind of the first much larger institutional round you’re raising generally from professional investors and you already have some momentum in product market fit and are starting to figure out: can you get the unit economics to work, and can you actually build a business around this idea? And so that’s what the series A is generally about. In the series B and on are different levels of growth rounds and they are basically: can you add to the hypothesis that not only does this business work at small scale, but can you add money to it and grow it to a venture skill business, all the way up to a mezzanine round, pre-IPO, and so that’s generally how the stages look.
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