What are the different startup funding stages? Every startup is founded with the goal of succeeding and growing into a market leader. However, it takes time, patience, and most importantly lots and lots of funds in order for a startup to achieve the goals set by the founders. As a startup climbs the ladder of success and growth, its functions expand, its expenses grow, and it needs more funding to sustain its growth.
Sure, profits may increase as your startup grows and you can always choose to sustain your startup without external funding. However, if you want to achieve your targets quickly, then fundraising is the way to go. Not only does outside funding reduce the financial stress of running a startup, but it also reduces the financial risk of the owner.
So in short, even if you believe in self-funding your startup, adding formal funding to the mix can always make growing your startup easier. There are simply too many expenses including marketing, R&D, compliance, and technical infrastructure among others that need to be in place for your startup to take off. In most cases, formal funding makes more sense than self-funding. Especially in a competitive environment in which speed and financial strength can be everything.
With that said, a lot of startups aren’t sure about the different formal startup funding stages and how each stage should be handled for maximum benefit. If you were wondering what the different stages of startup funding are and how to approach each one, then keep reading. In this article, we will explain what you need to know about the different startup funding stages.
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What Exactly is Startup Funding?
Because we’re talking about multi-stage or series financing, it entails many rounds of funding spanning over a course of time, depending on the startup’s stage of development. Series funding refers to when an entrepreneur obtains increasingly bigger amounts of cash to keep their firm afloat. Founders often begin with seed funding and go through Series A, B, and C, eventually reaching an IPO event or M&A transaction.
While a startup may use a mix of other forms of financing, venture capital is nearly always present, especially in the later rounds. Startup funding is a process that is used by entrepreneurs to raise funding for their new business, allowing it to grow and thrive at a large scale. When investors contribute to the funding of a startup, they do so to generate substantial returns from the company in the future.
Would you Like more information about what is the difference between Seed and Series A rounds? Check out this video I have created explaining more in detail what are the startup funding stages and how they work.
Startup Funding Stages that Every Entrepreneur Should Know About
The chances of a startup’s success increase drastically if they manage to secure seed funding. So it makes sense why seed funding has gained popularity among startups in the past decade. Combine seed funding with more advanced stages of funding and you have a recipe for success. With that said, if you are planning on getting funding for your startup, it is important that you understand the funding stages so you can match them with your startup’s growth phases and goals.
So, without further ado, here are all the key startup funding stages that you should know about.
The Pre-Seed Funding Stages
The pre-seed stage is usually the very first round of investment for a startup. It relates to the time when founders are just getting their operations off the ground. In many cases, you or your friends and family provide the majority of the pre-seed capital for your startup.
Often, at this point, entrepreneurs are employed and are saving money to launch their new business. The valuation of a business during this stage is pretty low.
Pre-seed rounds come in a variety of sizes, depending on the business. There is no one size fits all solution. According to research, pre-seed round sizes might raise anywhere from $100,000 to $5 million.
When it comes to establishing valuations and deciding how much to raise, you’ll want to consider your company’s capital needs.
After the pre-seed step, it’s time to put the seed in the ground and begin the initial operations of your business. “Seed funding” is the initial step of a startup’s investment. Almost a third of businesses fail due to a lack of funding, making seed capital essential for getting a company off the ground and sustaining it long enough to take off.
Seed funding is often the very first amount of money that a business raises. So it is not uncommon that companies will never go beyond the seed startup funding stages and will fail or go through a major pivot after this round.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
Seed Funding Stage
This phase of fundraising is ideal for startups with valuations in the millions. Some entrepreneurs believe that a seed round of fundraising is all that is required to get their business off the ground; these companies may never participate in a Series A round of funding because they manage to raise enough funds at this stage to sustain their business operations.
In a seed funding round, there are many prospective investors including family and friends, venture capital firms, accelerators, incubators, and angel investors. They choose riskier investment opportunities and expect to get an ownership share in the business in return for their capital investment.
After raising funds during a Seed Round, the business is ready to go on to the next round of capital fundraising, which is Series A funding. The idea of Series A investment is complicated for many entrepreneurs, but if done correctly, it can catapult their startup to new heights.
Typically, a business must have a developed product and a customer base with revenue flow to qualify for series A startup investment, it is also often known as the first actual round of institutional capital financing. It’s now time for the startup to pursue Series A investment and improve its value propositions. It is a fantastic chance for entrepreneurs to expand their business into new areas. So, take the time to understand how startup funding stages work.
Series A Startup Funding Stage
During the Series A funding round, startups with a viable business model can be worth much more. They’ve proven their concept, removed risks, and unknowns, and have built in more value.
The bulk of funding for Series A rounds may come from VC and other investment firms. They are not just looking for smart ideas and promising products, they are looking for a business with great growth potential. They look for a business that can turn their concept into a profitable, successful company. A single investor may serve as the lead during series A startup fundraising. After recruiting them, it becomes much simpler to recruit other investors. Although angel investors may want to invest at this level, they may no longer have enough capital to fill the need at this stage.
Startups that have already received seed funding and reached the Series A startup funding stages have already built a customer base and have real data and metrics to show investors.
Series B Startup Funding
The Series B round is a much more serious round than the previous ones. There is more money involved, and much more diligence on the business model and hard data. This is where companies bring in additional funds to enhance what they have accomplished so far, and begin to really multiply their results.
Again, securing a lead investor early on is important. Hopefully, you have well-capitalized partners from previous rounds who may step up to lead again. If not, you will want to leverage past investors for introductions to those with enough funds to participate in the next round.
If you do a great job managing relationships with existing investors, and leverage PR, you may also begin to draw inbound interest from other new investors.
This sets up the Series C startup funding stages. Where it becomes all about scale and expansion. Whether going international, acquiring other companies in your vertical, or accelerating marketing.
Series C Funding Stage
When seeking Series C investment, startups will be dealing with the largest and most sophisticated investment funds. These deals range from tens of millions to billions.
Investors are often later-stage venture capital funds, private equity companies, and other funds. Because the company is already established and just needs funds to develop or expand, it is less likely to pose a financial risk to investors. Though they will carefully vet the data.
This is all about growth and scaling at this stage. It may also be a bridge to becoming larger and more dominant ahead of an IPO or M&A transaction.
Series D Funding Stage
Companies that seek Series D capital often do so for one of two common reasons: they want the last push before going public, or they need more time to position for a better exit.
Series D and later rounds are becoming more common. They may become more common for strong market leaders if the public market or M&A market is not in an ideal place for an exit. It can buy time and hold companies over for a greater exit.
Private equity firms, hedge funds, late stage VCs, and corporates are among the prospective investors for the Series D investment round. It’s one of the important startup funding stages.
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.
IPO Startup Funding Stage
The IPO happens when the company’s shares are initially made available for public purchase. This provides a different type of liquidity event, and funding through the public markets, with much more money available.
The term IPO stands for “initial public offering,” which means that the general public may now participate in your business by purchasing shares. The IPO is utilized to raise funding for future expansion or to enable the founders of the company, and other earlier investors to sell out their remaining shares for personal gain.
Founders often do not stay on long after the company goes public. Even though this may be a big milestone that they have aspired to, it is a different world than working in a fast growth, early stage startup. Most real entrepreneurs ultimately crave going back to building something from scratch again.
Other ways to take your company to the next level can be through mergers and acquisitions. Which may make more capital and resources available to your company, and put it in capable hands, to be operated long term at a more mature and eventually at a slower rate of growth.
So there you have it, startup funding stages happen in steps. Not all startups will go through all of these rounds. However, as we have stated above, you can go into as many investment rounds as you want in order to raise funds to achieve your business growth targets, size, and ultimate outcome. Now that you know what the different stages of funding are for startups, you can better choose the appropriate funding strategy and target investors for your next round.
Each of these are building blocks to supporting and growing a company as it develops and matures. Which is why, every entrepreneur should know how startup funding stages work.
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