Investing in startups can be exciting, but the process is inescapably risky for both investors and founders. No matter which side you’re on, it is essential to understand the different investment rounds a startup goes through and how they work. Here is a quick overview of the various investment rounds, when they occur and what is important about each.
For investors, it is crucial to look for a proof of concept or MVP before putting money into a startup.
Pre-seed is the earliest funding stage. This is when the startup is still in its conceptualization phase, and the founder’s idea is still taking shape. At this point, most experienced or knowledgeable founders focus on creating a minimum viable product (MVP), meaning something that can be produced quickly and affordably to test the market. People often skip this step and instead “go big,” but that more aggressive path can lead to incurring huge losses if they guess wrong about whether a need really exists for their product, or if they underestimate the strategic and marketing challenge of breaking into an existing niche. Following the MVP model incurs less risk and smaller potential losses.
The funding at this stage is usually minimal. Pre-seed is often called the “friends and family” round because frequently that is who funds it. The founder may also self-fund the business at this stage, since investing this early is often too risky for even the most affluent angel investors. It is the most perilous stage for investors because the business’s success depends solely on the founder’s ability to execute the idea. For investors, it is crucial to look for a proof of concept or MVP before putting money into a startup.
By the second funding stage, the average startup has developed a more defined business model and an MVP. Seed funding is usually used to fund early product development, such as creating prototypes or hiring a team. Often the “friends and family” or founder are tapped out and need funding typically provided by angel investors or early-stage venture capital (VC) firms. The amount of seed funding raised can vary, but it hovers between $500,000 and $2 million for mainstream ventures. For investors, seed funding provides an opportunity to invest in startups with a higher chance of success than the pre-seed stage, but this phase still carries some risks.
Series A Funding
Series A funding is typically used to scale the business and expand operations, generally once the startup has achieved some success and has a working product on the market. Series A is the first institutional funding round, and therefore the most significant round for startups as this is the stage where they can attract substantial investments from well-established VC and private equity firms. Adult ventures rarely reach this point, however, since stigma makes large firms averse to putting money into porn. When adult ventures and investors converge, the framework described here can often go out the window.
For investors, Series A funding provides an opportunity to invest in startups that have achieved some level of success and have potential for growth. One of the non-adult ventures I’m invested in gained early attention from the noted VC firm Sequoia, which coyly commented to our founder, “Call us when you’re ready for your Series A.” Large firms understand that most startups don’t reach Series A, and the ones that do have profound potential for going public or being acquired, so that nod meant, “When you need real money, let us know.”
The funding amount for Series A can vary, but it is often upwards of $10 million or $20 million. The amount of equity the investors receive, and how much a founder has to give up, is determined largely by the valuation of the startup at that time. Therefore an accurate business valuation is crucial for the company’s growth and success, before proceeding to this stage.
Series B, C and Beyond
Companies that grow and achieve success following their Series A go on to raise funds in Series B, C and beyond. These companies either show investors returns, or the solid promise of future significant returns. Many companies reach these extended rounds of funding even though they have yet to be profitable. For example, SpaceX and Uber have raised over 30 rounds. SpaceX raised a $750 million round this past January and posted a profit in 2021. Uber posted a net loss of over $9 billion in 2022 and has never turned a profit. Many people are unaware that their favorite brands and companies have yet to be profitable, relying instead on additional funding rounds.
These funding rounds bring in massive infusions of funding intended to help companies grow faster, reach a profitable scale, enter new markets, expand product lines and/or acquire other companies. Typically, the players are private equity firms, hedge funds and investment banks. Investors want to see that the company has developed a successful business model, has a strong management team and has achieved operational stability.
While significant VC capital is rare in the adult industry, several adult companies are currently raising funds in rounds. These companies often appear mainstream or have a core mainstream business with adult content or market interests. Regardless, even if you’re building your adult business or raising funds privately with no intention of ever going public, basing your raises on finance industry standards is beneficial. It never hurts to do things the right way and, as I’ve said before, the adult industry won’t be taken more seriously until we take ourselves more seriously.
Juicy Jay is the CEO and founder of the JuicyAds advertising network, as well as the founder of Broker.xxx, which helps people buy and sell adult websites and businesses. He also provides executive consulting, business strategy and marketing services at Consulting.xxx.