What are Alphabet Rounds
Alphabet rounds are the first rounds of financing for a startup, known as such because the first is known as Series A, followed by Series B, and so on. These preliminary rounds of financing are provided by early investors and venture capital (VC) firms.
BREAKING DOWN Alphabet Rounds
Alphabet funding has nothing to do with the actual alphabet. Instead, each letter corresponds to a series of financing that leads to the development of a startup. When they are at these stages, these companies are in the process of raising capital.
How Alphabet Rounds Work
When a company is seeking venture capital funding, it will still have little or no revenue or cash flow, but will generally have an established business model and a clear path to a designated market segment. Venture capital firms, which are willing to invest in companies with limited operational histories in the hope of larger future gains, will typically wait until the startup has shown some basic signs of maturity and has exhausted its initial seed capital. Most VC firms are looking to invest with a time horizon in the five- to seven-year range, at which point they can hopefully cash out to a private equity firm or through an initial public offering of stock.
What Alphabet Rounds Say About a Company
You can always tell how financially mature a company is based on the round of financing it is going through. Basically, each round of financing will demonstrate where the company is in its financial journey, and it will also tell you the type of investor involved, the kind of capital it is raising and how it will be used. Most companies start off with seed capital, or the initial investment, then branch off into Series A, B and C funding.
Depending on the needs of the company, a Series A round of financing may be enough to propel the company to the point at which it can stand on its own operating cash flow. If, for example, a VC firm is participating in a later round of financing like a Series C round of financing, its potential equity stake in the company will already be diluted, and it will need strong conviction that the company will earn a solid return before committing any funds to the startup.
The Alphabet Rounds in Stages
When a company is looking for this type of funding, it is usually trying to develop a business model to generate long-term profit. Most Series A funding will generate between $2 million and $15 million. But high tech valuations have seen larger pools of funding in this round.
Most of the investors who take part in this stage often come from more traditional VC firms, such as Sequoia and Benchmark.
This round of financing is moving the business to another level. Since the company is now beyond the development stage, Series B funding can help expand its market base. This can include building a marketing team, research and development (R&D), advertising, recruitment, tech, support, and so on. This round will typically bring in between $7 million to $10 million.
The majority of the investors who take part in this stage are the same as the previous, however, there may be another wave of new VC firms taking part.
In the C series of financing, investors are looking to earn big returns for their investments. That means that the company is usually trying to expand in the market. This could include expansion in another market or even the acquisition of a competitor. Most businesses are earning single digits to hundreds of millions in the Series C round.
Since the risk has been mitigated to a big degree by this round, the pool of investors widens from those in the previous two series. By now, you will see hedge funds, investment banks and private equity firms jumping in on the action as well. But because the risk has dropped and the investor base has widened, that also means the potential for profits has also become diluted at this point.