Entrepreneurs seeking startup funding will typically go through a number of rounds of financing, as they progress from an idea to a growing company. Each stage of funding comes with its own benefits and drawbacks, and it’s important for a startup to understand these stages and what is expected of them during each stage.
In this article, we will take an in depth look at the different stages of funding and guide you on the best places to turn to at each stage. So, without further ado, let’s jump in.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. What are the typical startup funding stages?
- 2. What stage is your startup in?
- 3. How can you get funding during each stage?
- 4. How much money should you realistically expect to raise during each stage?
- 5. What is the typical process for securing startup funding?
- 6. Things to keep in mind when fundraising
- 7. Conclusion
What are the typical startup funding stages?
There are a number of different stages that a startup will go through when it is trying to secure funding. The following is a brief summary of the most common stages.
Pre seed funding is the earliest stage of startup funding. It is the form of financing that a startup company receives before it really gets going. Normally well before they’ve started generating revenue.
Pre seed funding is typically provided by angels, friends and family, or accelerators. The amount of money that a startup can raise in pre seed funding varies widely depending on the company’s stage of development, its business model, and the terms offered by the investors.
The main purpose of pre seed funding is to help a startup get its product or service to market and begin proving the concept.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the 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.
Seed Stage Funding
Seed funding is given to a company when it is just starting up, often in the form of convertible debt, which means that the money can be converted into equity at a later date.
Seed funding is also typically provided by angel investors and friends and family. Though more venture capitalists have been moving towards this stage as well. The purpose of seed funding is to help a company get its business off the ground and grow enough to be able to attract additional investment.
Series A Funding
Series A funding is often the first round of institutional level financing a startup receives. The goal of this type of funding is to help a startup grow its business and prove the business model. A series A round typically comes after a startup has completed its Seed Round and achieved some level of product market fit.
VC firms will look at a number of factors when deciding whether or not to invest in a company at this stage. Some key considerations include the team, the business model, the market size and the competitive landscape.
Series B Funding
Series B funding is the second round of major funding that a startup company raises. It is typically after the startup has achieved some level of success and is looking to scale its operations, or expand in some way.
At the Series B round investors are looking for a more mature company with a proven track record of executing on milestones. In order to secure Series B funding, a startup will need to have a clear business plan and be able to show some strong metrics.
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See How I Can Help You With Your Fundraising Efforts
Series C Through E Funding
Series C funding is all about financing growth. This is known as “late stage” funding, as it is typically the round of funding that a startup receives after it has proven its concept and achieved a good level of traction.
Series D and later funding is typically raised by startups that have reached a point where they are generating significant revenue and have a large user base. At this stage, the startup has usually proven that it can generate a return on investment (ROI) to its investors.
These rounds may enable a startup to acquire other companies, or act as a bridge until they go public, or are acquired.
What stage is your startup in?
It is essential to identify the stage your business is in so that you can make the most of the resources that are available to you. The development of a startup business can be broken down into five distinct phases. They are as follows:
The very first stage in creating a new business is known as “ideation”. When you’ve settled on an idea, the next step is to start developing it further. As an entrepreneur, you will be researching the viability of a product or service based on the problem you have validated and are setting out to solve.
The development stage is the process of building the product. This often starts with a MVP. Though some businesses need to launch with a polished product at scale.
There are several key tasks that need to be completed during the development stage. These include:
- Designing a prototype
- Testing the product
- Reiterating and tweaking
- Creating a marketing strategy
The development stage can be a long and difficult process, but it is essential for businesses that want to succeed in the competitive marketplace.
The growth startup stage is one of the most exciting times for a startup. This is the time when a company is seeing the most rapid growth and is on the cusp of becoming a major player in its industry.
There are several key characteristics of a growth startup:
- Product market fit has been found
- There is a lot more market share to be secured
- Demand is pushing the boundaries of what the startup is set up for
The maturity stage is the penultimate stage of a startup, and it is also one of the most important. It’s when a business has achieved a product market fit, is generating revenue and growth is plateauing. This is often a wise time for an IPO or exit through an acquisition to a private equity firm.
If founders hold out too long, they can pass the maturity stage and see their business decline. This may just be the industry they are in, becoming bogged down in being a big corporation versus the lean innovative startup they used to be, or for a lack of preparation for crises.
This may be a time to sell before further decline. Or it could be time to step back and bring in new executives, or re-focus to turn things around.
How can you get funding during each stage?
There are a few ways that you can get the funding you need during each stage of your business.
In the beginning stages, bootstrapping may be the best way to go. Bootstrapping often involves self-funding to finance the early stages of your company.
Once your business has begun to grow and you have proven that there is a market for your product or service, you may want to look to diversify your funding sources throughout the different stages.
At the startup you can approach angel investors who are willing to invest in a new business. You can also look for government grants that are available to small business startups, competitions with cash awards, and startup accelerators.
With more evidence and stronger finances you can apply for bank loans or lines of other forms of credit to finance your expansion. You can also seek out private investors or venture capitalists who are interested in funding high growth businesses.
When approaching the maturity phase, you can sell off part of your company to a larger corporation or attract an acquisition offer from another business. Alternatively, you can choose the IPO route and tap public investment.
How much money should you realistically expect to raise during each stage?
Because the amount of money you raise will depend on the stage your business is at, the sector you are in, and a number of other factors, this question does not have a single correct answer. However, there are some basic benchmarks that you can follow as a startup to have a better understanding of how much money you can expect to bring in.
Look at what other competing startups are raising. How much are others in other industries at this stage raising in this round? Consult a fundraising advisor to gain the latest insights into what’s happening in the market now, even if it hasn’t made it into the headlines yet.
What is the typical process for securing startup funding?
As above, there is no one size fits all answer to this question, as the process for securing startup funding can vary depending on the type of business, the stage of development, and other factors. However, there are some general steps that most startups will go through in order to secure funding.
The first step is usually to create a business plan and pitch deck. This document will outline your business idea, your target market, your competitive landscape and your financial projections. It is then presented to potential investors, who will decide whether or not to invest in your business.
Don’t forget your marketing plan. As well as to create and upload everything your investors will need for due diligence into a virtual data room.
Things to keep in mind when fundraising
When you are trying to raise money for a startup, it is essential to have a strategy in mind. You also need to be able to communicate the value proposition that your startup business offers, and you need to have a solid understanding of the market that you are trying to appeal to.
You’ll need to create a pitch deck and a fundraising plan, and you should also be prepared to answer questions about your business. It’s also important to have a strong team in place and to be able to show that your company is worth investing in.
Some other things to keep in mind include:
- Who is your target audience?
- What are you asking for?
- What is your timeline?
- How will you use the funds?
- What are the risks and potential roadblocks?
- How will you measure success?
When fundraising, it’s important to keep in mind what stage your company is currently in, and who your ideal investors are. Remember this is a series of funding events, not just a one time thing.
Keep in mind that each business is unique. However, comparing your progress to other startups can be productive if you learn from their errors and successes. Leverage the best professional help you can to streamline this process. Be patient. Fundraising takes time.
And that’s a wrap. Successful funding is critical for any new startup business, and your success will depend on a variety of factors as set out in this article. So, now that you are equipped with the knowledge of raising funds, isn’t it time to secure your next big investment?