We’ve previously covered seed funding rounds, why companies raise seed capital, and how to determine the amount of capital your company should raise. In this article, we’ll review Series A, B, and C funding, the follow-up rounds to seed funding a startup founders can raise when raising venture capital for their business.
While founders will all experience different results when raising seed and venture capital, many of them use equity-based funding for similar reasons:
While summarizing fundraising can be tricky—writing a generalized solution for specific fundraising situations can make things sound simpler than they really are—we’ll include specifics regarding biotech startups during our overview to avoid being too reductive.
Biotech fundraising has changed significantly over the past 10 years, and has been at an all-time high over the past two, with 2021 outshining 2020 by a long shot. (When we use the term biotech or biopharma, we’re generally referring to any company developing a drug or therapeutic. No devices or diagnostics.) We’ll cover the following:
This is not meant to be a completely comprehensive guide to Series funding, but rather a good starting point to provide you with some basic knowledge. Not every journey is alike, so it can be more useful to stay general when talking about stages of financing.
It can be helpful to speak with other founders that run companies similar to yours, as well as investors who have invested in startups in the same vertical or focused on a similar science. Their advice will be invaluable.
Series A, B, and C rounds are individual funding rounds startups can go through to raise capital to fuel progress towards certain milestones. These rounds are typically structured using equity financing, a type of financing where startup founders provide equity in their business in exchange for an investor’s capital.
There are more than just A, B, and C rounds, however. Series D and E rounds also occur, although they aren’t as common as Series A, B, and C rounds. Together, these lettered rounds can be referred to as series funding or financing. Investors at the series funding stage generally include venture capital firms and other types of institutional investors, but they may also include angel investors from time to time.
Most series funding is structured through priced rounds, although it isn’t uncommon for a seed round to be priced. A priced round involves an investor purchasing shares in a startup at a negotiated price per share, and is used to signify the type of financing structure of the investment. By referring to a round as a “priced round,” it distinguishes the round’s financing structure from a round structured using a convertible instrument.
Seed rounds are often funded through convertible instruments like convertible debt and simple agreements for future equity (SAFEs), while Series rounds are typically priced, and involve company valuation and priced shares.
In general, once a startup has successfully raised a seed round, it will deploy those resources to buy, rent, or lease equipment and space, hire key team members, and fund initial research and development. For biotechs, this is typically where discovery and development happens. The founders may have conducted research at a university or other company to prove the science is possible, and now it’s time to experiment and study.
If all goes well, the founders can raise another round of funding. This is referred to as a Series A, and the capital secured here will be used to build on their business model further, create data points, fuel product development, or optimize a product that’s showing traction with users or patients. For many startups (mainly ones outside of biotech and the life sciences), now is the time to prove scalability and take a product to market.
After a Series A round has closed, 12-24 months can pass before a company decides or realizes it’s time to raise more capital. This time frame depends on several factors, however. Two of the most important factors include cash runway and cash burn rate. Right now, founders have to pay attention to how fast they’re spending money (cash burn rate), and how much they have left (cash runway).
These two things will play a major part in the decision to raise capital at any given moment. (For biotech companies, this timeframe between rounds can be even wider; a round may be raised to last a company anywhere from two to five years.)
Series A rounds are followed by Series B, C, and D rounds. This financing is considered part of a startup’s growth stages. The company has established what works, shown significant traction—revenue is growing steadily, product adoption is up, and market reach has increased—and is now completely focused on product optimization, customer base expansion, and potentially going public or being acquired (read: liquidity event).
It’s no longer about getting the wheels in motion, it’s about building on the successes of an established business model and product and going to the moon.
Considering all this, it’s clear that each round has its own purpose, and plays a specific role at each phase of a company’s growth. The capital raised each round is used for different reasons, and certain goals must be met before that capital is raised. However, a specific financing round may look completely different from one company to another.
Understanding the basic reasons why and when companies raise capital will help you eventually navigate external funding yourself. Let’s go over each round of funding in a little more detail, starting with Series A funding.
A Series A round, also referred to as Series A financing or Series A funding, is the first round a company participates in after a seed round, and is followed by a Series B round. It’s considered early stage venture capital funding, and is often grouped together with seed financing.
Like a seed round, it is a significant milestone for any startup. Series A is generally much larger in size than a seed round, and much more difficult to close. The percentage of startups that graduate from seed to Series A is small, according to many reports. The range starts at less than half (~49%) and goes lower than 10%. (In some reports, the number is even lower, dropping below 4%).
Unless you’re the founder or an employee of a pre-revenue biotech, the types of startups that do survive the seed-to-series gap are most likely ones generating revenue. While revenue is one of the strongest signals venture capital investors use to decide whether they’ll invest, many investors in the life sciences won’t expect a young biotech to be generating revenue.
With a larger amount of capital secured, a startup’s founders can put the wheels in motion and significantly ramp up efforts to bring a product to market or accelerate research and development. In the case of research, a startup can deploy its funds raised to begin generating the data points needed to take a drug or therapeutic to the next step, clinical trials. So reaching this milestone is a massive win for entrepreneurs.
Founders can expect to give up somewhere around 18-25% of their company ownership in a Series A. However, the number can get as high as 30 or 40%. It all depends on the valuation of your company, your employee stock options, any convertible notes from your seed round, and the terms you negotiate.
Founders can use company performance (e.g., milestones and metrics) and industry benchmarks to decide whether or not it’s time to raise more venture capital. These milestones can include increased traction (you’ve grown X% month over month, showing stability), strengthened product-to-market fit (product usage is increasing, feedback and testimonials are positive), and a clear path to scalability.
You will also most likely have supporting data, in the form of KPIs, to illustrate this growth. Series A investors are more likely to back your company if you can show them hard numbers, unlike a seed round where an idea and compelling narrative can be the most important persuading factors to potential investors.
When do founders typically look to raise a Series A round? Biotech startups often go through long periods of R & D, which means that the milestones you may use aren’t related to revenue, they’re related to research.
To help you establish a target for raising a Series A, determine what research milestones you need to hit. Reaching these will represent your ability to deliver results and convince VCs you’re worth the money and will use it wisely. Hire a strong team in between a seed round and Series A round as well, as investors will look at your team’s strength and skills when making a decision to invest or not. You and your team’s strengths can be as important, if not more important, than your idea at this stage of fundraising.
Series A financing results in millions and millions of dollars being invested in a startup. Compared to seed rounds, Series A rounds are huge. A startup can generally raise anywhere between $2M and $15M in a Series A, but over the past few years, that number has increased to $20M or more due to a large number of mega-rounds across a number of industries.
Despite mega-rounds skewing the numbers, both seed and Series A rounds have increased in size over the last decade.
According to Crunchbase News, the average global Series A increased from less than $6M to more than $18M over the past ten years or so. In 2020, the median Series A round was $13M, a 5% increase from 2019, when the median round was $12.4M.
Biotechnology saw a huge increase in investments over the last 2 years, accompanied with an overall strong decade of investment growth, ultimately peaking in 2021. The first three quarters of 2022, however, have slowed down dramatically in terms of public investment (private investment levels remain somewhat healthy). This slow down is due in part to macroeconomic factors and investor fears as well as an extremely bullish 2021.
Many of the existing investors in the life sciences are industry experts, with an established track record of investing in biotech startups. They often have a science background as well, and can navigate the data points biotechs use in place of product usage when showcasing their milestones and metrics.
However, the investor landscape is changing. A larger number of “crossover investors” and hedge funds are participating in biotech investments in 2021, becoming much more active at the Series A stage. “Tech-bio” investors, software and tech investors who have become active in biotech, are slowly beginning to participate more in seed and Series rounds as well.
According to Bay Bridge Bio, established biotech VCs led 40% of Series A deals from 2018 to 2020. However, that number has dropped to 35% through the first eight months of 2021. This change may signal that crossover investors may start to become more prominent players in biotech. Bay Bridge Bio also provides a comprehensive dashboard that covers biotech and biopharma VC, IPO, and M & A trends that’s worth checking out.
Some of the major VC biotech investors participating in Series A financing include firms like:
A Series B round, also referred to as Series B financing or Series B funding, is the next round raised after a Series A, and generally the third equity financing round. Startups that raise Series B are seen as less risky investments, since they have proven themselves to a significant degree by generating data points and gaining insights into the underlying biological phenomenon driving their preclinical study.
During Series B funding, some of the existing investors of the company will typically participate because it is to their advantage to continue the upward trajectory of the business.
Valuations for Series B funding rounds tend to be higher than Series A. Having a higher valuation means that investors in Series B funding rounds often get less equity for their capital, simply because the startup itself is worth more now.
This means that the new investors commonly purchase the shares at a higher price than the investors who injected their money in the previous stages of funding. Thus, their returns are lower. However, the risk associated with losing their investments is lower as well.
Generally speaking, founders choose to raise a Series B for two reasons: their company is performing well (i.e., stable growth and revenue) and they’re seeing an increase in their user base. When a founder has an established business on their hands, with proven product-to-market fit, signs of repeatability and scalability, and are generating significant revenue month-over-month, it might be a good time to raise a Series B round. With a Series B round raised, a founder can start the company’s next phase of development, expanding operations and product significantly.
Biotech startups aren’t generally judged by the same standards as other startups, however. Instead of metrics like users and revenue, biotech founders are expected to have relevant and accurate data regarding their work, with the data points to back up their claims of a drug or therapeutic working the way it should.
While a Series A round is raised to fund research that will take their drug from the discovery phase to the development stage, a Series B is used to get that drug to clinical trials.
Furthermore, Series B funding rounds see a higher success rate than Series A funding because many of the companies that do successfully close a Series A have already done most of the heavy lifting. Now, it’s a matter of growing the business and expanding. In the case of biotech startups, the science “groundwork” that’s backing up the product has been laid, and it’s a matter of getting into clinical trials.
When a startup is able to close a Series B, the funding gained is typically used to scale up operations, hire more talented team members, and increase marketing and advertising. For example, increasing availability, productivity, and market reach are some of the goals startups have in mind when raising Series B funding.
Raising a Series B, like a Series A, requires the startup to issue new shares. The startup’s valuation and the amount of capital an investor puts into the company will determine the amount of shares they are issued and the percentage of the company they will own. One drawback of issuing more shares is that existing shareholders (i.e., investors) will see their percentage position decrease as a result.
Because of this, Series B investors will ask to receive convertible preferred shares to mitigate share dilution. Convertible preferred shares are preferred shares that include the option to convert the shares into a number of common shares after a set date. One of the negotiated terms is typically a provision which is anti-dilutive, i.e. a ratchet or weighted average method so that the original investors maintain some or all of their “percentage” interest. Investors don’t ask for convertible shares solely for anti-dilutive purposes, however. They may also negotiate preferred dividends or specific approval rights for some company decisions, board seats, information rights, and other terms in addition to the anti-dilution protections.
The average Series B has changed over the years, and reports the amount raised vary slightly. According to an analysis of 38 Series B deals in June, 2020, conducted by Fundz, the average Series B funding round in the U.S. was $33M, with the median being $26M. The averages found between the two reports here are somewhat close in size.
However, according to a separate analysis conducted by Richard Murphy at Bay Bridge Bio that focused on VC-backed biotechs and biopharmas that IPO’d between 2018 to Q1 of 2019, the average Series B was $63.5M, with the median being $52.4M
As you can see, the average Series B can be different, depending on who you talk to, what companies and deals that were taken into consideration, and when they conducted the analysis.
During a Series B, most of the existing investors of the company will participate, although they won’t always lead. It’s usually possible for them to join in each subsequent round because of what’s called their “pro-rata rights”, a standard deal term included in a VC term sheet.
In short, pro-rata rights guarantee the investor the chance to invest proportionally to their ownership percentage in a subsequent priced round, allowing them to maintain their percentage of shares in the company as it scales. So, if you raised a seed round or know someone who raised one, chances are that those investors will also participate in the Series A, B, and C rounds. (If they occur.)
That said, new investors typically enter this financing round as well. It’s more common at this point to see venture capital firms that specialize in investments in later-stage companies, as well as some private equity firms participating. Investors from the previous financing stages—the seed and Series A, in this case—can even help attract new investors into the company. New methods of financing, such as equity crowdfunding platforms, may be introduced too. Equity crowdfunding in biotech is somewhat new; however, it is beginning to catch on as it proves itself a viable path to financing.
Some major players in early-stage biotech financing that are also well known for their participation in Series B include firms like:
Series C rounds are considered the fourth, and sometimes last, round of equity financing, and are generally raised by successful, established companies in their late stages of development; ones that might not really be considered startups anymore. Hence why many consider this stage to be the first round of “later-stage” funding.
Businesses raising a Series C want to scale up operations and continue growth by reinforcing their successes, expanding into other markets, and developing new products. However, they need another injection of capital to accomplish these goals, hence the Series C round. These rounds can extend beyond Series C as well, going into Series D, E, F, and G.
Raising a Series C or any later-stage round of financing is one of the ways companies can also prepare for an acquisition or an initial public offering (IPO) in this day and age. It follows the adage that “Series A is the new B” and “Series B is the new C”. Now, raising a Series C comes with the expectation that your business is pre-IPO.
The average Series C raised in June, 2020 was, according to Fundz, $59M, with the median being $52.5M. That number has increased significantly since the early 2010s, similar to the increase we’ve seen in seed, Series A, and B rounds.
From 2018 to Q1 of 2019, the average Series C was $63.3M, with the median being $52.2M, according to Bay Bridge Bio’s report referenced earlier in the article.
That said, it’s safe to assume that the range for a Series C falls between $30M and $100M, with some outliers of course.
The types of investors begin to change in the later rounds of financing, with a larger number of late-stage VCs, private equity firms, banks, and hedge funds participating, now that there is inherently less risk in the investment.
That said, according to a Pitchbook report from 2017, the most active Series C investors in the U.S. from 2015 to 2017 include:
Many of these names are still highly active in late stage financing to this day. However, a large number of them also participate in earlier-stage financing, such as seed, Series A, and B.
As you know now, a startup’s external fundraising typically begins at the seed round, which often consists of investments from family and friends, angel investors, and more risk-tolerant venture capital (VC) firms.
In general, however, VCs didn’t participate in seed rounds nearly as much as they do now. There are many more late-stage players taking part in early-stage funding these days, and this shift in options has led to a larger number of seed funds being available. In biotech specifically, fundraising has changed dramatically. In many ways, it has followed the fundraising path the tech industry took over the past decade and a half.
This path includes the “venture creation model”, where a company was “incubated” in-house at a VC firm. It became a common method VCs used to found and grow tech companies when the costs of a tech startup were considerably high. As firms saw success with this model, it became more common for VCs to use the same model to spin up biotech startups.
There are many life sciences and healthcare-specific VC firms today that found startups in-house, one of them being Flagship Pioneering. One of the firm’s portfolio companies, Moderna, was incubated in-house, and is a great example of how venture funding in the life sciences industry changed initially.
But, as the costs of starting a biotech dramatically decreased due to new types of infrastructure, founders started seeing progress and success on their own or with much less funding. The changes in cost and the risk associated with funding a biotech startup soon led to a larger number of VCs participating in seed rounds.
Large seed funds are now more commonplace, and you have likely looked or will look into several as you research your options at the seed round and Series A round level. IndieBio is an excellent example of a seed fund with a strong track record of supporting companies in the life sciences.
This shifting landscape has made starting a biotech, funding the science, and retaining more control as a founder less challenging. (It’s still very challenging, by the way. Less than 10% of the companies that raise a seed round successfully raise a Series A.) Furthermore, the increased interest in biotech funding has made the competition to raise follow-up rounds (Series A, B, C, D, and beyond) stronger. Due diligence will be thorough, so it’s essential to collect as much data as possible.
Startup founders in every sector often rely on Series A, B, and C funding rounds to fuel operational growth, expansion, and more. These rounds are considered a type of equity-based financing, because the company receives capital in exchange for company shares (typically, preferred shares), which gives the investor an ownership percentage in the company. Many investors and founders expect the company to grow significantly and eventually IPO, generating substantial returns as a result.
Besides the potential of an IPO, many founders seek out venture capital financing because it is one of the best ways to scale their businesses at a consistent and rapid pace while tapping into networks and resources that would otherwise be unavailable.
While many startups in the life sciences often utilize equity financing, there are alternatives to consider. They may not help a company grow as quickly, but they are often excellent ways to begin the “growth engine”. These alternatives include grant funding, university funds, private investments from biotech experts (individuals), and startup or small business loans.
Is venture capital the right fit for you and your startup? It all depends on your goals for the company, and what you’re willing to pay in return for a huge capital investment. In many cases, biotech startups go on to be extremely successful. However, the road ahead is challenging. Hopefully this article will help you a little bit by providing you with a better understanding and overview of Series A, B, and C financing.
This article is informative. It is not meant to represent legal advice. Before raising capital through equity financing, it is best practice to speak with a lawyer who has a track record in startup and venture capital deals.