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Funding rounds explained: Seed vs Series A vs Series B - YouTube
Channel: Slidebean
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in this video we're gonna break down
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startup funding rounds and what they
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mean because because honestly it's not
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the most intuitive of concepts the
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convention to name a round seed versus a
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series a or a series b or c rc responds
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mostly to the company's stage and a
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little bit to the size of the round a
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lot of the confusion here comes from the
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fact that rounds can vary in size a lot
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you can find seed rounds at 250 000 and
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at 2 million dollars and they are both
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true seed rounds or at least that's how
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they report them on on crunch base so
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let's get to it
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so the first the first thing that you
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need to understand is the type of
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company that raises venture capital
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because only a handful of companies have
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access to that
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type of capital the reason i know any of
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this is because we are a venture-backed
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company ourselves i also spoke to a
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couple of founders of series b or crc
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backed companies and most importantly
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because of what we do we help companies
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navigate this mess that's a shameless
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block but anyway venture capital
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normally comes in when a company has the
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ability to scale massively i'm talking
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tripling their revenue year and year for
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a few years and getting into hundreds of
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millions of dollars in annual revenue
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and not all companies can achieve that
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in fact only a handful can a marketing
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agency a consulting company a dev shop a
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blog a youtube channel most ecommerce
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platforms don't really qualify as
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venture backable companies just because
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they can't usually afford to grow that
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fast in this day and age venture
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capitalists aren't looking for an
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e-commerce shop they're looking for
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companies like like shopify where
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millions of online shops live they're
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looking for transformative companies
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that are using technology to disrupt how
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millions of people or thousands of
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companies do things we made a whole
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video about this gap between what we
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call startup versus small business the
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venture backable and the one that can't
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be venture-backed i'll link it if you
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want to watch that both of these
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companies have access to capital but
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it's different capital it's different
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investors this series abc alphabet is
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most commonly used for the second type
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of company the fast growing startup and
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the only reason why we qualified to
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raise money as that is because we're a
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sas product our youtube channel or our
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design consulting branches they're not
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venture backable businesses themselves
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okay so disclaimers aside let's go
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through the stages of one of these fast
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growing startups the first thing that
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you need to understand here is that a
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round should provide enough capital to
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reach the next round that's a very
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common mistake founders make they raise
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money without actually running the math
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to confirm that what they're doing where
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they're spending their money is enough
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to reach their next fundable milestone
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so let's start talking about precede
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let's let's run a scenario a few guys
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got together a couple of product people
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maybe a dude with some marketing skills
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and they figured that they would start a
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company and maybe this is a b2b sas
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platform the first thing that they need
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to do is raise some money to get started
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right no
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that's wrong that's the wrong approach
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the first thing that they need to do is
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figure out if their product whatever
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they're going to build makes sense and
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if there's a market for it and you don't
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really
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need
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that much money for that or any money at
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all you don't need a product for that
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before money before building anything
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there's a phase of asking questions of
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talking to people there's a phase of
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building a fake landing page and pushing
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people there to seeing how they react
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which we actually did ourselves you can
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do all of this without any investor
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capital maybe some savings maybe keeping
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your day job but if you were if you were
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to raise money at this stage
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we would call this a pre-seed round this
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is the earliest capital a company can
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raise so pre-seed rounds are normally
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used to build a first product prototype
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but not necessarily to launch it this
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process might be enough to maybe get
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some customers but the idea is that this
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protest should unlock the door give you
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the key to go out and raise more capital
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to go out and raise a seed round and
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actually begin growing aggressively
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pre-seed rounds are normally under 500
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000
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and are normally raised from friends and
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family investors because there is no
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product all you are going with is a
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pitch deck an idea and your team's
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reputation that means that going out to
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strangers for this capital is unlikely
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to yield success because they just don't
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know who you are now seed rounds are
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used to begin growing the product the
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assumption here is that the product is
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ready or almost ready and that the seed
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round should suffice to get the company
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to the next stage which in this case is
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a series a that's very important about
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any round and so
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so often overlooked by founders founders
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often raise money to either launch the
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product or get a random arbitrary number
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of customers or maybe 18 months of
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runway a round needs to be enough to put
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the company in a position to raise the
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next one period i'm i've said it like
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three times now anyway it's it's not
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profitability it's not the 18 months
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it's the position to the next round
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timing is also very important by the way
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the money does need to last for at least
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12 months so that you're not immediately
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back fundraising just a couple months
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after closing the previous funding
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fundraising is very distracting it stops
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the ceo from doing their job which is
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essentially growing the company but the
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next fundable milestone after a seed
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round is a series a so let's understand
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what's required for that the benchmark
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for a series a round varies from
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industry to industry and it varies
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depending
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honestly on the fundraising landscape
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but in our case let's talk about our
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example which is software as a service
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it's usually around 1.5 million dollars
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in arr maybe two million dollars that's
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about 125 to 180 000 in monthly
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subscriptions and that of course comes
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with other variables a good
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understanding of what the company did to
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get there signs that there's a good
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product market fit where customers love
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the product where usage is high and
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churn is low another variable is how
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fast the company is growing at the time
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a company that took three years to get
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from zero to one point five million are
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with funding is very different from a
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company that took 12 months to achieve
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it or from a company that bootstrapped
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it momentum is very important fewer than
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half of seed funded companies make it to
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series a and and the size of a round
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varies a lot i've seen rounds as small
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as 2 million dollars and as big as 10
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15 million dollars the average series a
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for 2020 was 15.6 million and this is
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where things get a little confusing of
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course because if a company raises 2
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million is that a seed or is it a series
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a remember it's not about the money it's
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much more about the company's stage and
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the time of the race starting at this
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stage funding rounds are very much tied
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to an anchor or a brand name vc so if
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you're raising 10 million dollars you're
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not gonna want to go find dozens of
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angel investors for that companies at
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this stage are looking for a venture
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capital firm that can lead the round the
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anchor or the lead takes care of the
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diligence negotiates the deal provides
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credibility to the whole thing to the
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company and for other investors to
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follow suit and there are a lot of angel
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and venture firms who will tell you that
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they don't lead rounds they just follow
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rounds and it's honestly a smart
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investment strategy because they just
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have somebody else do all the hard work
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by the way crowdfunding is another
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option here once you've got a lead
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investor maybe the lead committed five
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million dollars and you need to fill in
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the other five using other investors we
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made a whole video about that by the way
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more on series a since we're dealing
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with bigger numbers investors want more
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oversight of their money it's very
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common for investors at this stage to
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negotiate either a board seat and or
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preferred stock and or other investor
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protection mechanisms after series a
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things of course will get a lot more
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serious you're still a startup yes but
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you're at a stage where you should be
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making millions of dollars a year you
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have clearly identified market and
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you're ready to take over so here's pete
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sullivan who's the ceo of a company
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called jackpocket if you're in new york
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you've probably seen them and he's
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talking about what happened with their
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series a just for context their their
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company does this has this ios app that
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sells lottery and we had gotten new york
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and at this time new jersey to say okay
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we're going to do regulations so i think
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investors had you know were
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opportunistic that this was finally
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going to come to fruition at some point
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that they had to kind of pay to you know
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get in early but at the same time we
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were able to launch uh two smaller
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states and were approaching um a launch
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in texas which was a huge state for us
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and so at that point um you know our
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revenue is a percentage of the amount of
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ticket sales but i think we were at that
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point showcasing enough that investors
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could extrapolate hey if they continue
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to add states and we continue to add
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marketing uh we're going to see this
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thing continue to grow and so the points
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that i think we had proven out by then
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were
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um
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that the cost of acquisition and the
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average spend so ltv to cap ratio was
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getting into a place that the product
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would be viable long-term now we needed
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to scale that
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and texas was that first opportunity
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that allowed us to scale it was funny
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the b was very oversubscribed because at
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that point again we now have momentum
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that something was going to happen in
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new york we had momentum that something
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was happening in new jersey and we had
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shown that we can get into other states
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okay so before we go into series b i
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want to talk about a limbo what happens
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if you don't get to where you're going
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say you have raised a series a you have
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investors and you have 10 million
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invested in your business but the
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company just didn't manage to grow that
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fast that is a bad tight spot to be in
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if you're a venture-backed company
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because it's a lot of money from
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investors that's stuck because your last
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valuation was maybe 20 30 million
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dollars so the only way they can get
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that money out if you're growing slow is
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an acquisition that makes sense and that
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pays them back on their investment so
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you see you can see a fair share of
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cases like this you can just search for
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series a funded companies that haven't
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raised in maybe three or four years
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they're probably in that limbo another
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common limbo happens between seed and
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series a a company that raised maybe one
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or two million dollars but has not
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reached the momentum or the size needed
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for a series a this actually happened to
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us i told that story
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in a couple of videos on how churn was
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probably the culprit for all this so
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i'll also link that anyway the name post
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seed comes from this if you ever hear it
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a seed company that's not yet series a
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stage and for the most part post seed
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rounds aren't great deals these are
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companies that don't have a lot of
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leverage to negotiate the terms of that
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round and it's kind of like a bridge to
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maybe make it to series a that's not
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what this video is about i can make
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another one discussing some more
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examples of these limbo cases and how
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companies have gotten out of them but
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let's get back to the alphabet stuff so
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serious b if things go as planned you
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are on your way to a series b preparing
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to take over what what is taking over
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well this means a lot of expensive
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things that that means branding
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marketing a much more experienced team
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probably coming from other startups and
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that takes money so according to
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investor pedia the average series b is
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33 million dollars however that amount
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the goals and the use of funds of a
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series b can really vary a lot for
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example we helped the guys from upkeep
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we we wrote and designed the deck that
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they used to raise their series b and
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they ended up raising about 36 million
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dollars and most of the time that we
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spent on that pitch deck was on metrics
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it was proving to investors that they
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understood everything about their
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customers and how those numbers would
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scale i also spoke to eric johnson from
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members so they raised a 20 million
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series a is dead not equity which is
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another explanation itself i can do
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later but for the series b they raised
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66 million dollars tell me a little bit
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about it like tell me a little bit about
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the expectations what do investors
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expect will happen
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18 months or 24 months after this round
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closed yeah so
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you know for us it's a unique situation
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because we've actually been profitable
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for many years even when i had that high
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interest debt payment right and we you
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know like last year like close seven
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eight million dollars in ebay right so
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you know we've always been a casual
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heavy business so for us it's not
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necessarily about losing money right now
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right it's more so about
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like reinvesting
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any profits we have right and giving
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ourselves a little bit you know uh more
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cushion to do so
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right um this is a true kind of in in
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all
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shapes and you know this is a growth
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investment which is cool like it's not a
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hey you know the investors are looking
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for dividend returns right in the next
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you know three years or the investors
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are are looking to just do nothing but
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you know go buy companies right it's
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it's an organic growth story
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and we're going to be you know you know
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um opportunistic in any
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m a activity that makes sense but this
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is a growth plan all about now when
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you're going through a round like that
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you really have to lay out you know
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you had a very detailed model right a
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very detailed typically a five-year
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model
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is going to go into kind of a base best
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and worst-case scenario
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for the future and then you have to sell
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the investors on that model and let them
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understand that model so
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um that's where your banker really comes
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in and helps you out with that um and
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then once you
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have a model right that is is testing
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typically you know they'll discount that
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model right away you know on their end
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usually 20
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so financial models and a detailed
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understanding of those numbers became a
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common theme with everybody i spoke to
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it seems that what you need to
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accomplish with the series b looking to
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raise a series c is just this incredibly
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detailed understanding of your
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financials and your projections it's
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certainty or
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something close to that that your
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company can scale a lot more so these
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rounds happen on hard data never on
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ideas
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not on unknown expectations capital may
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come from vcs maybe from hedge funds
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private equity firms because you're
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essentially dealing with a large company
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and a proven business model some of that
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funding may also connect to acquisitions
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a company at this stage can begin
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absorbing competitors or other strategic
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deals like that so a lot of things can
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happen after series c these days you can
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see companies staying private with
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sirius going all the way to e and f
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alternatively they can begin a push to
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an ipo which can provide investors with
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their much desired roi out of these
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investments we made a couple videos that
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will be useful here a video explaining
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the entire process of going public which
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i will also link in the description and
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then a video kind of like going through
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the journey of a startup raising money
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from seed going through vesting periods
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and the founders quitting and finally
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going through an acquisition and how
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much money they made so it's like this
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four
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video series i'll also link that but
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just to do a summary of everything we've
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covered pre-seed rounds are for
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pre-product companies they're mostly for
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friends and family investors and usually
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under 500k seed rounds they need to be
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enough to get to a series a and should
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be invested mostly in growth they should
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give the company momentum to get on a
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track of growth series a rounds again
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enough to reach a series b focus on
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understanding the customer and proving
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unquestionably that this product works
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for them also in series a you're
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beginning to build a solid proven team
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for series b and series c rounds and
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anything after this is just scale it's
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focused on detailed financials strategic
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partnerships or acquisition but anything
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that
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drives you to this world domination hope
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that all was useful guys see you next
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week
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you
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