9 stages of Startup Funding
The word 'startup' appears to be all over the place these days, and the popular notion has achieved a distinctive significance across nations. The overall number of startups is increasing in both developed and developing economies. As a result, it's safe to conclude that this bandwagon is on its way to being the industry's frontrunner.
But ever wondered how do these startups actually start-up?
Funding!!
The money required to establish a new business is known as startup funding. It originates from several places and can be utilized for any reason that aids the startup's transition from idea to reality.
Click here to learn the difference between Startup and Small business
Before you take a closer look at how funding works, what funding rounds are, and what sets them apart from one another, you need to understand that that each startup's journey and funding timeline are unique.
Many businesses spend months or even years looking for finance. While others may skip some of the rounds and move faster through the capital-building process.
You need to identify the various players and their roles in the process of funding. First, there are those who have a startup idea and are looking to gain capital for their business.
Then there are those, who are looking to invest in new businesses to gain profit from them in the future. These groups of business enthusiasts are known as potential investors. They play a key role in the funding process of a startup.
Over the years, startup funding rounds have radically changed the corporate environment. Not long ago, there were limited choices for startup funding, but we've recently seen a boom in requests for startup funding at various stages.
As a budding entrepreneur, you must identify where your company stands and how much money you can acquire from outside sources.
Let's take a look at different stages of startup funding:
Pre-seed funding
The pre-seed funding stage often refers to the time when a business is getting its operations up and running. This key step of seed funding occurs so early in the process that it isn't even called startup investment.
- Commonly known as bootstrapping, it is the process of launching a business using only your resources. Startup founders invest from their own pockets at this stage and aim to build their businesses in the most resourceful way possible.
Being an entrepreneur, you may need to work overtime or seek a second job throughout the startup's development stage to put the extra money into your new venture.
Seed funding
You may think of the seed funding stage as being similar to the process of growing a tree. In an ideal world, the underlying Funding would be the "seed" that would ideally grow into a "tree" with enough income and a successful business plan, as well as the patience and devotion of investors.
It enables a business to fund its initial steps, such as market research and product development. A new business can acquire help deciding what its ultimate goods will be and who its targeted audience is with seed funding.
In a seed funding situation, there are many potential investors: such as entrepreneurs, friends, family, incubators, angel investors, and more.
- An angel investor is a wealthy individual who invests in a business in exchange for a share of the company's ownership.
- While they can make the difference between a startup's success or failure, angel investors are the first and foremost investors.
- But it doesn’t mean that t they are just going to give their money away to you. They do want it back at some point and to increase their chances of receiving it back, they thoroughly analyze a company proposal before investing in it.
Since the amount of money acquired at this level might be much bigger than in the previous round, you'll need a convincing and well-researched proposal to get the angels to give your startup their blessing.
Venture capital phase
Venture Capitalists are professional investors who invest in startups and emerging businesses . This makes them a responsive audience when you're searching for investors to pitch.
However, considering the average venture capital investment is $1 million or more, you'll need to be through the early phases of your company and It might take months to complete the transaction.
Venture capital financing can help your company expand into new business channels or consumer groups, or improve marketing efforts to attract more customers.
At this point, your startup is either profitable or might benefit from this additional round of funding to offset negative cash flow as the company grows. There may be many rounds of funding at this stage, and investors may offer to join the organization and contribute further expertise.
Series A
By now, the company should have developed a product or service and established a client base with a steady revenue stream. It is reasonable to assume that the funds obtained will be used to generate income. This is an ideal opportunity for emerging businesses to expand into new areas.
Super angel investors and regular venture capital companies are the primary sources of Series A investment. They are not searching for "amazing ideas," but rather for businesses with a good business model. As that can transform their excellent concept into a successful, profitable firm, letting investors profit from their investment.
Series B
Series B rounds are all about pushing businesses through the development stage and into the next phase. Investors, in this round, assist startups in reaching their goals by increasing their market reach.
Companies that went through seed and Series A investment rounds have previously built significant user bases and demonstrated to investors that they are ready for larger-scale success. The firm will need Series B capital to expand to satisfy these levels of demand.
Series C
New firms must be on the development path by the time they reach stage C. now the companies are searching for further funding to assist them to develop new goods, expand into new areas, and even ensure that similar new company deals are not met. They may even consider purchasing other underperforming businesses.
At this time, investors are aware that the firm is doing well and that the odds of it failing as a corporation are slim. Since less risk is associated at this stage, many investment banks, hedge funds, and private equity organizations come to play.
Series D
Only a small percentage of businesses see the need to go to this stage and they choose to do so for one of two reasons.
- The first reason may be that the firm has discovered a fresh potential and wishes to focus on it before pursuing an IPO. Otherwise, the firm might wish to wait a bit longer before launching an IPO.
- Another reason for the company to seek funding at this time maybe that they have fallen short of the goals set out. It gets more difficult to break out of this when the company's stocks depreciate, and getting funding in the following stage is challenging.
Learn more about Series Funding
Mezzanine Financing & Bridge Loans
Your startup is expanding and aiming to scale up with a commercially accessible product at this point. Even if the firm is not yet successful, revenue should be streaming in regularly.
The funds raised at this time will be used to expand into new areas, make mergers and acquisitions, or prepare for an initial public offering (IPO).
At this point, investors want to see a clear path to profit shortly. Mezzanine finance, for example, can help pay the costs of an IPO. The mezzanine investor gets repaid with interest from the proceeds of the IPO.
Similarly, companies and other organizations use bridge loans as an interim financing option to secure their short-term position until a long-term funding alternative can be secured. It usually comes in the form of a loan or an equity investment from an investment bank or venture capital firm. It can also be used for initial public offerings (IPOs) or to replace a loan with an equity-for-capital exchange.
IPO
The IPO, or Initial Public Offering, is when a firm decides to sell its stock to the general public for the first time. This is the final step of the startup funding process, and it helps the company in growth and diversification.
All of the investors who have traded their money for stock up to this point should be able to reimburse their investment plus profit. Some investors may keep their shares, but you shouldn't be shocked if a large number of them sell their stock from the start to reap the benefits of investing early.
Stock options for a growing firm may be used to recruit top employees after the IPO. And enhanced access to finance can give resources to keep your business moving ahead.
Click here to Learn more about IPO
Conclusion
The different stages of startup funding enable you to expand your business at any point in the journey. This scaling strategy enables you to determine where the business stands and which possible investors would be interested in helping you develop them.
Remember that your company must be developed enough to qualify for a given investment round to get funds. Your startup's net worth might help you figure out where it stands.
After the company has gone public, many founders choose to retire. Many of them would rather become angel investors themselves and put their hard-earned money in other businesses. After all, they've earned the right to unwind and educate other entrepreneurs on how to expand and profit from their businesses.
