Over the past few years, the startup funding rounds have had a profound effect on the corporate world. Until recently, there weren’t many opportunities for funding startups at various stages, but that’s changed. If you’re just getting started in the world of startups, you need to take stock of where you are and how much money you can get from outside investors.
Here is a high-level look at the many types of startup funding before we go into the specifics of each.
Startup Fundraising Stages
Pre-Seed Funding: The bootstrapping stage
Seed Funding: Product development stage
Series A Funding: First round of VC
Series B Funding: Second round of VC
Series C Funding: Third round of VC
Series D Funding: Special round of funding
IPO: Stock market launch
Let’s take a closer look at the fundraising lifecycle and the various points it occurs at in a startup’s development.
1. Pre-Seed Fundraising
Because it occurs so early, this round of seed money isn’t even classified as startup capital. A startup’s pre-seed fundraising stage typically coincides with its early stages of operation.
During the pre-series stage, investors are less inclined to put money into a firm in exchange for stock. Pre-series finance can be obtained quickly, or this phase can drag on for quite some time. The nature of your firm and the associated initial investment are key factors to consider when crafting a viable business model.
Bootstrapping refers to the period of time before a company receives initial investment. To put it plainly, self-scaling means making use of the assets you already own to expand your firm. The founders of new businesses risk their own money to get their businesses off the ground and they use every available strategy to expand.
For the sake of investing in their new venture, entrepreneurs may have to put in more hours or take on a second job to make ends meet during the early stages of their company’s development.
They may already have a functional prototype of their product and be looking for investors to help them take it to the next level and turn it into a full-time business.
As a result, many new business owners go to their fellow startup’s early on for advice. It helps them figure out how much money they’ll need to get their idea off the ground, create a successful business model, and learn how to expand their concept into a real company.
The pre-series period is also an ideal time for entrepreneurs to settle any legal matters, such as partnership agreements, copyrights, and so forth. They may become prohibitively expensive or possibly impossible to overcome in the future. In addition, no investor will give money to a company that has legal concerns before it launches.
Pre-seed fundraising is the stage where startups are valued ranging from $10,000 to $100,000.
2. Seed Funding
Funding for new startup’s typically begins with “Seed funding,” the first of several phases. Seed capital is essential to get a business off the ground; without it, about 29% of startups fail due to running out of capital during bootstrapping.
The initial funding phase is like planting a tree. The seed money is what helps a business get off the ground. With time and the right kind of care—in this case, a sound business plan—a startup can blossom into a thriving enterprise.
When raising initial capital, businesses are expected to offer investors a stake in the company in exchange for their support. This is especially risky because it is impossible for startups to guarantee a profitable business plan at this early stage.
Startups need seed money to cover the costs of product launch, initial marketing, key hires, and additional market research necessary to find product-market fit.
Seed capital is given to startups with an estimated value of $3 million to $6 million. If you have a viable startup, you can get anywhere from $500,000 to $3 million in capital at the seed funding stage.
3. Series A Fundraising Stage
Series A stage is the first round of venture capital financing.
The startup ought to have a finished product and regular customers by now. They should go for series A capital and refine their value proposition now. This is a fantastic possibility for entrepreneurs, as it opens the door to expanding into other areas.
Having a strategy that will deliver long-term earnings is crucial in the Series A investment round. Frequently, new businesses have brilliant concepts that could attract many dedicated customers, but they have no clue how to make money off of them in the long run.
Now is the time to familiarize yourself with the process of raising capital and to begin establishing contact with potential angel investors and venture capitalists. Using the 30-10-2 rule, find potential backers for your business. This rule stipulates that you must gather the support of thirty investors before proceeding with your venture. At most, ten of those thirty investors will even consider your pitch, with only two actually committing to funding it.
Traditional venture capital firms and angel investors (directly, or indirectly via Crowfunding Service Platforms) provide the majority of Series A funding. Investors aren’t searching for companies with “amazing ideas;” rather, they want to put their money into new ventures that have a plan for turning those ideas into a profitable business.
Although a single investor can operate as a “anchor,” when a firm has attracted one investor, it is much simpler to bring in more. Despite angel investors’ preference for this phase, they often wield far less sway than venture capital firms do at this point.
It is estimated that startups with a solid business model and a valuation of $10 million to $30 million can achieve around $15 million in Series A funding.
4. Series B Funding Stage
Startups that have already received seed funding and concluded a Series A round of funding have established a solid user base and income stream. The concluded I’ve shown their backers and the public that they can scale up their success.
Investors help young businesses broaden their horizons by financing efforts to broaden the company’s client base, increase its market share, and establish its operational teams in areas like marketing, business development, and customer success. Growth and diversification are possible in the series B investment stage, allowing firms to better serve their customers’ needs and thrive in highly competitive sectors.
While the methods and players involved in a Series B funding round may seem identical to those of a previous round, it is often driven by the same people, such as an anchor investor who can help you bring in other investors. The most notable change is the appearance of a new breed of venture capital firms with a penchant for backing established entrepreneurs in the hopes that they will continue to defy expectations.
You’ve had this catch-22 where your Series A backers were crucial to your success at the time, but they might not be the backers you need moving ahead.
The Series B capital round typically provides $30 million to startups with a revenue plan and a valuation of $30 million to $60 million.
5. Series C
If a startup is able to secure series C funding, it is likely well on its way to becoming successful. These businesses are on the lookout for additional capital that will allow them to expand their operations into new areas, develop innovative goods, or even buy out weaker competitors in their field.
Investors are pleased to provide capital in the series C investment round for established businesses. They anticipate making a return on their investment that is greater than their initial outlay. A startup’s Series C funding phase should be dedicated on speedily expanding its operations.
With Series C finance, your company can make a number of strategic acquisitions that will allow it to rapidly expand its operations. The risks associated with your startup have decreased, allowing more investors to participate. In the Series C phase, your startup will find many willing investors among hedge funds, investment banks, private equity organizations, and the like.
The company has shown itself to be successful in its early stages of operation, which is why this is the case. In order to establish themselves as industry leaders, a number of new investors have begun pouring large sums of money into successful businesses.
You should know that Series C Funding is for mature firms that have proven themselves, built a solid clientele, created reliable revenue streams, and are ready to take their operations global. All of the above must be done before you can apply for Series C funding.
During the Series C investment round, a startup can raise around $50 million, which is sufficient for a company valuation of $100 million to $120 million.
Sixth, and Beyond the Series D Funding Round
6. Series 6, and beyond!
It’s not common for a startup to reach this point. For unusual circumstances, entrepreneurs can seek capital in the Series D funding stage. For instance, if it has not yet achieved its expansion target, or if company has undergone a merger.
A startup may consider Series D capital if it has not yet gone public and is considering a merger with a competitor on mutually agreeable terms. Series D capital provides entrepreneurs with the most practical options, such as merging with another company or tackling tough negotiations head-on.
In addition, a firm will require more capital through series D funding if it was unable to reach its growth milestone with series C funds.
Companies valued between $150 million and $300 million can often raise $100 million in this phase of startup finance.
7. The Holy Grail...Going Public with the IPO!
An initial public offering (IPO) is the first time that shares of a company have been made available to the public.
Companies that are still in the early stages of their development commonly utilize this method to raise money, while more established companies use it to let the owners of startups sell their shares to the public and withdraw some or all of their capital.
There is a predetermined sequence of steps that must be taken in order for a startup to complete its IPO. In particular, they are:
Putting together a group of outside experts including underwriters, attorneys, CPAs, and SEC specialists to work on the public offering.
Information gathered on the startup, including its past and projected future financial performance and business activities.
The financial statements of the startup are audited, and an opinion is formed on whether or not it should go public.
In the event of a public offering, entrepreneurs enjoy advantages other than the ability to raise capital for a firm. Added benefits include:
Since it already has access to public markets, a public company can raise more money through secondary offerings.
Executives at many publicly traded companies receive stock as part of their salary. Staff members are more likely to invest in a publicly traded company since their shares can be traded more freely on the open market. Having a public profile also helps attract top-tier employees.
A public company can purchase a private one by issuing shares to the public market, making mergers much simpler for both parties.
8. In Conclusion
The several types of startup fundraising stages make it possible for founders to expand their business at any point in its life cycle. They may assess the current health of their firm and learn whether investors are interested in funding its expansion thanks to this scaling exercise.
Keep in mind that businesses can only receive investment if they meet the requirements of a given funding round. An organization’s net worth is a good indicator of its health.
After an initial public offering (IPO), many founders of startups retire. Many of them also like the idea of being their own “angel investor” and putting their money to work for other businesses. They have every right to kick back and give other business founders tips on how to increase growth and revenue.