From Seed to Series C, We Explore How an Innovation Undergo Various Financing Rounds
Over the years, you’ve probably seen the many news regarding our portfolio companies raising a certain amount of money in some kind of financing round or another. Some of you may wonder, what do the different types of funding rounds mean?
In this article, we’ll take a closer look at what these financing rounds are, how they work and what sets them apart from one another. Each company goes through a somewhat different path, as well as the timeline to raise capital. While many startups spend months or even years in search of funding, an innovative life sciences company (especially those with a novel idea or technology, or perhaps those attached to individuals with a proven track record of success) have the potential to move through the process of building capital more quickly.
The General Idea of Funding
First and foremost, a financing round is anytime money is raised from one or more investors for a company. It usually becomes noteworthy when they enter financing rounds such as Series A, Series B or Series C (notice how each letter follows another).
It’s important to identify the different participants first. On one side there are the individuals hoping to raise capital for their company. As the business becomes increasingly mature, it tends to advance through the funding rounds; it’s common for a company to begin with a seed round and continue with Series A, B and then C funding rounds.
On the other side are potential investors. While investors show a genuine interest in the potential of what that company seeks to offer, they also seek to gain healthy returns from their investment. Having that said, nearly all investments made during a stage of funding or another is arranged as such that the investor or investing company retains partial ownership (shares or stake) of the company.
In short, investors would put in a certain amount of capital in exchange for equity. If the company grows and earns a profit, the investor(s) will be rewarded based on the investment made.
An Overview of Financing Stages
The earliest stage of financing (to get a company up and running) is the pre-seed stage. In most cases, the investors in a pre-seed funding situation are usually the company founders themselves.
Before any round of funding begins, analysts conduct a valuation of the company in question. Valuations are done from various aspects, including management and track record, feasibility and market potential, as well as the risks involved.
There are key distinctions between each financing round, including the current valuation of the business, as well as its maturity level and the prospect of growth.
Seed Funding Stage
Seed funding is the first official equity financing stage. It represents the first official amount of money that a company raises. The analogy of seed funding is like planting a tree. This early stage of funding will be the seed that will help to grow the company. Given enough revenue and a successful business strategy, the company will hopefully eventually grow into a tree.
Seed funding rounds can vary significantly in terms of value, ranging anywhere between USD 10,000 up to USD 2 million.
With seed funding, a company can determine the final product(s) and the target demographic. Seed funding is essential to employ a founding team to complete these tasks.
Seed funding investors may comprise founders, friends, family, incubators, venture capital companies and more. Angel investors are commonly engaged in seed funding as they tend to appreciate riskier ventures.
Series A Financing
Once a business has developed a track record, that company may opt for Series A financing. For a life sciences company, this usually occurs when they have a technology or drug (vaccine or therapy) with the potential to advance through clinical research and development.
In Series A funding, most investors are on the lookout for something novel or truly innovative. While the average Series A funding in 2020 was USD 15.6 million, it’s common for firms going through Series A funding rounds to be valued at more than USD 23 million. OncoMyx Therapeutics for example that is developing oncolytic immunotherapy for the treatment of various cancers, raised USD 25 million in their Series A funding back in June 2019.
The investors involved in the Series A round come from more traditional venture capital firms. At this stage, it’s common for a few venture capital firms to lead the pack. For example, a single investor may serve as an anchor, as such that once a company has secured that first investor, it’s easier to attract additional investors as well.
Series B Financing
This stage of financing is all about taking businesses to the next level, past the development stage. Investors with a large market potential can help startups expand their market reach. Companies that have gone through seed and Series A financing rounds have already developed substantial market share and have proven to investors that they are prepared to succeed on a larger scale.
Series B financing is used to grow the company further so that it can meet these levels of demand (usually on a regional or global scale). In the life sciences sector, companies undergoing a Series B financing round are usually progressing their innovation into phase 2 or phase 3 of clinical trials.
At this point, such companies are well-established, and their valuations tend to reflect that. Most Series B companies have valuations with at least USD 30 million and above.
Notable life sciences companies that have undergone series B financing include:
- InterVenn Biosciences (USD 34 million in November 2020) – company specializing in AI-driven glycoproteomic analysis platform for liquid-biopsy
- Imago BioSciences (USD 40 million in May 2019) – biotechnology company developing innovative treatments for myeloid diseases,
- Aria CV (USD 31 million in February 2020) – a developer of medical devices treating pulmonary arterial hypertension (PAH) disease.
Series C Financing
Companies that make it to Series C financing stage are already quite successful. These life sciences companies look for additional funding to complete phase 3 clinical trials and expand their capabilities (manufacturing, operations, etc.) into new markets.
Series C financing is where investors inject capital into the meat of successful businesses and are usually focused on scaling the company, growing as quickly and as successfully as possible. Life sciences companies gaining up to hundreds of millions of dollars in Series C financing rounds are prepared to continue to develop, manufacture and distribute their products on a global scale.
Strategically, Series C financing can help boost a company’s valuation in anticipation of an initial public offering (IPO).
Notable life sciences companies that have undergone series C financing include:
- Rapid Micro Biosystems (USD 120 million in May 2020) – company specializing in contaminant testing platforms for pharmaceutical and vaccine manufacturing
- Congenica (USD 50 million in November 2020) – a digital health company developing genomic analysis technology for rare diseases and inherited cancer
- Acutus Medical (USD 75 million back in March 2016) – an electrophysiology company focusing on the diagnostic and treatment of complex arrhythmias
Other life sciences companies include InterVenn Biosciences (USD 201 million recently in August 2021) and Imago BioSciences (USD 80 million in November 2020), these companies previously completed series B financing, before progressing to series C.
Conclusion
Different rounds of financing operate in essentially the same manner; investors offer capital in return for an equity stake in the business. Series funding enables capital market players to support innovators with the proper funds to carry out their R&D as well as enjoying profits together down the line in an IPO. For this reason, venture capital and private equity firms play a key role in leading the way for equity investment.
Sources:
- https://www.forbes.com/sites/alejandrocremades/2018/12/26/how-funding-rounds-work-for-startups/?sh=797847297386
- https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp
- https://www.seedrs.com/insights/investing-features-insight/types-of-funding-rounds-and-what-they-mean
- https://www.upcounsel.com/funding-round-meaning
- https://knowledge.dealroom.co/knowledge/investment-funding-rounds
- https://en.wikipedia.org/wiki/Venture_round
