Pre-Series Financing: Key Insights for Founders

Startups often find themselves navigating the complex world of fundraising, and one term that’s becoming increasingly common is the “Pre-Series.” But what does it really mean, and when should you use it?

We find that some startups attach the “Pre-” label to a funding round because they didn’t secure the full target amount or feel the amount raised doesn’t align with what’s typically associated with that stage. But there’s more to it than just numbers. In this update, we break down the concept of a Pre-Series and explore the strategic reasons why startups might deliberately structure or label in this way. Whether you’re a founder planning your next raise or simply looking to understand venture capital dynamics better, this is for you. 

What is a “Pre-Series” Financing? 

A Pre-Series financing is essentially an intermediary funding round that bridges the gap between traditional stages of investment, such as between Seed and Series A, Series A and Series B, or Series B and Series C. A Pre-Series financing is typically named according to its position in the funding sequence, such as “Pre-Series A” or “Pre-Series B. While a Pre-Series round closely resembles a traditional funding round with venture capitalists conducting due diligence, evaluating the start-up’s prospects, negotiating term sheets, and finalising agreements, a Pre-Series round is typically utilised to meet specific objectives before progressing to the next major round.

When Should You Raise a Pre-Series? 

If we assume a start-up that has raised a Series B, a Pre-Series C can make sense where the start-up has shown growth but needs to prove additional metrics (e.g., scaling a new revenue stream or entering a new market) or where the startup is preparing for an IPO or acquisition but needs more traction to boost valuation. There can be a number of other drivers as per as follows:

1. Scaling Operations or Bridging Gaps

A startup may need additional capital to scale operations, expand into new markets, or hire key talent, but its metrics (e.g., revenue, growth rate) may not yet meet the high thresholds expected for a traditional Series C.

2. Preparation for a Full Series C

A start-up may need funds to achieve key milestones or refine its business model to make itself more attractive to Series C investors. Metrics like annual recurring revenue (ARR), user acquisition, or profitability might need bolstering to justify the valuation expected in a Series C round.

3. Market Conditions

Unfavorable market conditions (e.g., economic downturns or tighter venture capital availability) may delay a Series C, forcing the startup to raise an intermediate round to maintain momentum.

4. Investor Alignment

Pre-Series C rounds can serve to bring in strategic investors who can offer more than capital, such as expertise, market access, or partnerships that prepare the company for a more robust Series C round.

5. Burn Rate and Runway Extension

If the startup is running low on funds but still needs time to hit the metrics required for Series C, a Pre-Series C round provides a financial cushion. This avoids the risk of raising a Series C at a lower valuation, which could dilute existing investors more significantly.

6. Valuation Increase

A Pre-Series C financing round can allow a startup to increase its valuation incrementally without the pressure of a full Series C. This positions the start-up to be able to potentially negotiate a higher valuation when it is ready for the larger round.  

This publication is not intended to provide legal advice and is not prepared with a specific client in mind. Kindly seek professional advice specific to your situation. You may also reach out to your usual Balogun Harold contact or contact us via support@balogunharold.com for support.