Are you wondering how funding rounds work for startups?
The big numbers thrown around in the media might make you think that one big fundraising campaign or two is enough to finance your business idea for life. It doesn’t work like that. Startup funding is done through a series of stages of ‘rounds’.
Each round typically targets a different type of investor, for different amounts of capital. Investors will have differing expectations of entrepreneurs and their startups at each stage. While there are always exceptions, these round often come 12 to 18 months apart.
Once you start, you’ll always be in fundraising mode. So, you had better know your stages and how to stay ahead and prepared to ace them.
If you are wondering about how funding rounds work for startups remember that most startups can start out by bootstrapping. This can be a short term or medium-term solution. Many of our largest and most successful startups and entrepreneurs got off the ground with just $1,000. More with under $10,000.
That may not sound like it will go very far for you, but if you are scrappy and creative it might just be enough to start generating revenues. The longer you can bootstrap the more equity and negotiating power you will preserve.
This strategy will also help you get the most out of every dime, and keep you focused. When you do have money, you will use it far more efficiently.
If you don’t have the cash to self-fund your venture, you may be able to carry it with personal credit, and small business credit cards and lines of credit. Just be wary of taking on heavy and expensive debt.
If you have big hopes for your startup, you will eventually want to bring in outside money.
There isn’t much in the way of professional and institutional capital available at this stage. There may be grants and competitions to win. They may provide anywhere from $10,000 to over $150,000 in early funding.
Most of the money at this startup stage will come from friends and family. Even if you don’t think your immediate family and friends have this level of money, their friends and family and their friends may.
Push your circle out enough and there will be people who have the ability and interest in investing. Just be careful of who you give equity to, and how much you give up at this stage.
Seed Stage Funding
When it comes down to how funding rounds work for startups this is where funding begins to become more formal. Entrepreneurs may still be largely pitching on an idea at this stage. Though some may be further along.
Startup accelerators may participate with modest fix and six-figure sums at this stage. Although there may be more funds seeking to secure better terms in this round, the most common type of investor will be angels.
Investing at this stage is a sizable risk for investors. They’ll take an equally sizeable piece of your equity.
Your personal network, the strength of your relationships and pitch deck is what will get you through this round.
Series A Round
The series A is where startup funding really starts to get more buttoned up if you are thinking how funding rounds work for startups. You’ve made good use of the money you’ve already raised. You have some proof that your solution is working and there is good demand and feedback. You have data that potential investors can look at, track and evaluate.
The money raised in this round will help you optimize, polish and systemize.
A wide variety of investors can participate in this stage. They may include angel groups, family offices, private equity, and corporate venture firms.
Series B Rounds
B is for building out. Your startup is on pretty solid ground if you are ready to raise a series B. Only around half of all startups make it long enough to raise a series B.
You have a proven product or service. You have product-market fit. You have real data that investors can make a decision on. You will be raising at least tens of millions of dollars in this round.
Money raised at this stage will be used to scale and expand on everything you are doing right. You may be moving into new geographic regions, making new hires to handle higher volumes of business and to improve processes for where you want to get to next.
Your investors at this stage will already see some type of path to an exit. Though you will also have revenues, if not actual profits. Notable venture capital funds are going to be among the main participants in this round.
Series C & Beyond
A Series C round is for scaling. Your business works, there is potential for a big win on the horizon.
Investors at this stage are going to be among the largest venture capital funds, private equity firms, and corporations. They are going to be among the most demanding you’ve met yet. They have teams to conduct due diligence and negotiate. They are putting in sizable sums of their customers’ cash.
Your company is probably worth at least nine figures. The new money will be used to make big moves to dominate the market, expand to new areas, and even eat up other companies.
Remember that storytelling plays a key role in fundraising. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
M&A and IPOs
The next major liquidity events for your startups are going to be an M&A deal or going public. Most founders will be saying farewell to their startups soon after this milestone. It’s a much different world heading up a public company or working for someone else as a department head. Most entrepreneurs just aren’t cut out for this for a long period of time.
You may have your stock tied up for a proportion of time or an earnout period which requires you to stay on with the company.
Be sure you are working with an accomplished M&A advisor at this stage who can help you assess and negotiate the best deal for you.