Startup Funding Landscape Explained

The startup funding landscape has changed significantly over the past few years. While five to ten years ago the options available to startups were few, lately we’ve witnessed an important surge in Venture Capital available for startups at all stages. From seed to growth, from Series A to Series C.

This increase in capital has been accompanied by the creation and development of alternative financing vehicles such as crowdfunding, investment syndicates and new and fresh Venture Capital firms that bring different approaches to the market. With this guide we’ll look at what types of fundraising vehicles are being used at the different stages of a startup’s life.

At Tern PLC we define five main funding stages...

  1. Pre-Seed Funding
  2. Seed Funding
  3. Early Stage Investment (Series A & B)
  4. Later Stage Investment (Series C, D, and so on)
  5. Mezzanine Financing

If it's not your plan to get venture capital down the road, then you'll probably stop in Stage 2-receiving enough funding to boost your marketing, sales, and infrastructure to grow organically from there to the point where you are satisfied or ready to sell.

Stage 1: Pre-Seed Funding

You have an idea, maybe a working prototype and are looking for funding that will allow you to focus on your project full time. Pre-seed capital tends to cover the first stage in the life of a startup.

Typically this funding comes from friends, family members, credit cards-whatever you can get. It could be as small as £5,000 and as high as £100,000. 

Though the amounts are lower, this round is more difficult to get institutional funding for. Banks are not ready to make a Small Business loan on a company that has yet to launch, break even, or establish a track record.

With the money you can beg or borrow you will furnish your business with the bare essentials needed to begin making and fulfilling your first sales.  Necessary machinery, an initial website, your first batch of inventory-things you can't function without.

During this round, you'll be testing what works and what doesn't, perfecting your business plan and will start building your management team. Here, you prepare to scale up the things that do with future funding.

Worthy of note here are accelerator programmes. Five years ago there were very few startup accelerator programmes in Europe, but these days there’s an accelerator in every single big European city.  London hosts a long list of them. These organisations provide capital, mentorship and office space to teams in exchange for 5 to 10% of equity. The Entrepreneur Handbook provides a useful list with accompanying overview of UK based business accelerators.


Stage 2: Seed Funding

Seed funding rounds are typically small. The main providers of capital at this stage are business angels, super angels and early stage Venture Capital firms and the recent phenomenon equity crowdfunding. Frequently, the investment is structured as convertible notes or common stock. 

With seed funding, you hope to grow your business and, at the very least, gain proof of concept.  That is, you'll use the funding to build a product or service and prove that customers want to buy it, often through research and development and market research. 

Stage 3: Early Stage Investment (Series A & B)

"Series A" is the term used to describe the first round of institutional funding for a venture. The name is derived from the class of preferred stock investors receive in return for their capital. 

The average Series A round is between £2 million and £5 million, with the expressed goals of funding early stage business operations for 1 to 2 years. Startups that get to this stage have usually figured out their product, the size of the market and need capital to scale, improve distribution systems or establish a business model if they don’t have one yet.

‘Series B’ is the round that follows Series A in early stage financing. In this round you can generally raise £5 million to £10 million, but can sometimes raise up to £20 million in capital or more.

Series B funding is “all about scaling”. Successful startups at this stage tend to have an established user base and a business model that is working.

Stage 4: Later Stage Investment (Series C, D, etc.)

Series C, D and so on are further rounds of venture capital funding. Some venture-backed companies have raised over 10 rounds of financing – there’s no rule as to how many you can and can’t have.

When companies reach stage C they’re fully mature. The business model is working - whether the company is profitable or not, user base is expanding and acquisitions might be in the minds of the executives leading these companies.

VC funding serves as more fuel for the fire, enabling expansion to additional markets (e.g. geographical expansion) and diversification and differentiation of product lines.

Financing rounds at these stages tend to range from tens to hundred of millions. A clear difference between Series C and other rounds, besides the amount being invested, is that at this point private equity firms and investment banks tend to be the lead investors, with the participation of large Venture Capital firms.

Stage 5: Mezzanine Financing

Mezzanine investors generally take less risk, since the company is perceived as solid and ready to "cash out" relatively quickly. 

Funds received here can be used for activities such as:

  • Mergers and acquisitions
  • Price reductions/other measures to drive out competitors
  • Financing the steps toward an initial public offering

 If all goes well, investors may sell their shares and end their engagement with the company, having made a healthy return. Many tech IPOs – including Facebook and Twitter were only possible after years of VC funding that fueled user and revenue growth.

A note on share dilution

It’s common sense that overall dilution decreases with each funding round. Most often the Seed round is the most painful for the entrepreneur because you’re giving away 20–30% in the equity raise and an additional 10–20% for the option pool.

I came across the below table from Quora which is a helpful guide.




Post-Series A

Post-Series B

Founders 100% 85% 30% 20%
Seed Investors     10% 5%
Series A Investors     50% 31.3%
Series B Investors       31.3%
Option Pool     10% 12.4%
Total 100% 100% 100% 100%


Being realistic

A Forbes article stated “99.95% of entrepreneurs should stop wasting time seeking venture capital.” Although this percentage seems brutal, the reality is that in order to achieve fund returns, VCs only invest in the best of the best.

Does this mean you should give up on the thought of VC or institutional investment? Absolutely not. What it does mean is be realistic about your chances of obtaining funding right off the bat and whenever an opportunity arises to pitch throw everything you have at it.

If you choose to approach Tern about funding then ensure you bring your A-team to pitch and cover all the basesand more in your presentation. For help with your pitch then read this blog on ‘Preparing your pitch for funding’ that provides an overview of the information we’re looking for at the pitch stage.

I’m always interested in hearing from potential investees. Contact me by email at or via linkedin.

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Every month Tern has an open office day where invited companies can pitch their investment opportunity. To book your place on our next day, fill in our form here.

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