'Cyber company raises $150 million in Series C', 'Startup emerges from stealth with $24 million seed round', 'Company valued at $3.8 billion'. Headlines like these appear almost daily in Israeli tech news. But what do they actually mean? Here is a short guide to the language of fundraising.
A startup needs money to grow before it is profitable: to pay salaries, build a product and find customers. It usually gets that money from venture capital funds and private investors, who give money in exchange for part ownership of the company, that is, shares. Raising happens in stages called 'rounds'. A pre-seed or seed round is the first money, when there is mainly an idea, a team and maybe an early product. A Series A usually comes when there is a product and first customers and money is needed to grow. Series B, C and beyond fund expansion, new markets and sometimes acquisitions.
And what is 'valuation'? When an investor gives $100 million for 10% of a company, the company is valued at $1 billion. Understand this: it is not money the company has in the bank, nor a price someone will pay for it tomorrow. It is an estimate reflecting what investors believe the company will be worth in future. A private company valued above $1 billion is called a 'unicorn'.
Why are investors willing to risk so much? Because the model is 'a few win big'. Most startups fail or sell for modest sums, but one big success can repay a fund for all its other investments and more. Early investors in Wiz, sold to Google for $32 billion, made many times their money. That is also why investors look for companies that can grow very fast, not just profitable businesses.
What does it mean when you read about a raise? A big round signals investor confidence but does not guarantee success. As this week's closure of Explorium, which raised more than $127 million, showed, even a company that raised a lot can shut down if the market changes. And remember: raising at a high valuation obliges the company to grow accordingly, or the next round will be harder.
