Apart from a great idea and a potentially wealth-generating business model, a startup requires capital for investment. Different stages of funding fulfill this need of a startup at different stages of its growth. Without access to adequate capital, an entrepreneur would never be able to get his or her business on its feet. Therefore, an entrepreneur must look for different ways to raise capital.
And this required amount of capital is raised by funding. In the startup world, different stages of funding exist. Which stage of funding a startup is in need of is decided by factors such as success, popularity, initial revenue, and the size of the business. In this article, we will dive deep into the different stages of funding for startups.
1. Pre-seed stage
In the pre-seed funding stage, you as an entrepreneur would be required to fund your startup from your own pocket. In this stage, the startup is not yet set up and only the initial ideas exist. You will be required to carefully chalk out plans to make your business big. You need to come up with strategies to rapidly grow your startup and gain popularity so that investors would be attracted to your startup and you move on to the later stages of funding.
In this stage, you can also take the help of your friends, family, and acquaintances to fund your startup. Bootstrapping is an important part of the pre-seed round as you will need to make exploits of your existing resources and money to start your business. Therefore, you must come up with a clear estimation of how much you can afford to spend in order to avoid bankruptcy.
2. Seed stage
After you have made the initial investment for your startup from your own pocket and have successfully got your business up and running, the seed funding stage comes into play. The seed-stage refers to the preliminary funding of a startup. Reports suggest that 29% of startups fail to make it big because they run out of resources while bootstrapping. Hence, the pre-seed stage is an important stage to keep your business going.
The funding in the seed stage is generally used to create a Minimum Viable Product (MVP) for your company. Then it is tested in the market and the reviews of customers are gathered. The money involved in the seed stage is also used to conduct market research and understand your customers which are necessary for the development of a successful Minimum Viable Product.
The funding in the seed stage is generated by:
· Friends and family
· Angel investors
· Venture funds
· Crowdfunding
As in this stage, your startup is relatively new and has not tested thoroughly, investors who invest in your startup take a huge risk. Therefore, the investment made by investors comes at the cost of equity. So, be sure that you carefully understand how much equity you can trade for how much money.
3. Series A stage
Series A funding stage comes into play when you have successfully developed a Good Minimum Viable Product and a customer base. At this stage, you are also able to draw in a consistent flow of revenue. Now it is time for you to move on to series A funding to grow your startup more smoothly.
As you have already proven that your startup has the potential to morph into a huge business, it will be easier for you to draw in investors at this stage. Apart from investors, you will generate a large number of funds from Venture Capitals (VCs). The investors and ventures that provide you with funding in series A will be more interested in your business strategy instead of your startup ideas. Therefore, make sure to create a strong business model as you progress into this round of funding.
4. Series B stage
Startups that make it to the Series B stage are well established and have proven their worth in the market. If you manage to reach this stage it is a great sign that your business is progressing rapidly as most startups fail to reach the series B funding stage. By this point, you have acquired a substantial user base and have a steady revenue flow.
It is now proven to investors that you have the efficacy to achieve success on a large scale. As a result, more investors and venture capital firms will be interested in your company. The initial investors who spend on your startup acquire an ‘anchor’ position. He/she works closely with you and guides your startup in the right direction. When you get an anchor investor, more investors are automatically drawn to you.
But while choosing your investors you should keep in mind some important points. The investor should be interested in the idea behind your startup. He or she should be willing to put effort into ensuring the growth of the business. It is not a good sign if an investor does not meet this criterion as then it is an indication that he or she might bail out from your company at a later stage.
5. Series C stage
You are ready for series C funding when you have successfully incurred a thriving business. At this stage, you have a well-established consumer base and popularity in the market. The funding from the Series C round is used to research and develop new products, reach new markets and even acquire under-performing startups from the same niche.
Investors in this stage will enthusiastically spend on your startup in the hope of high returns. As you have already established your worth in the market, a flurry of investors will come your way. This stage is all about finding ways to rapidly grow your business and become a global player. Investment in this stage is less risky owing to your proven record of success.
Funding in this stage is provided by:
· Private equity firms
· Hedge funds
· Investment banks
· Late-stage VCs
6. Series D stage and beyond
The series D stage of funding is not very popular. It is only necessary if you do not hit your growth mark using the series C funding. In that case, you can take the help of series D funding to raise some more funds and reach your set target.
It is a special round of funding is comes into play in uncommon circumstances such as acquiring a merger. This funding may also be used to solve unfavorable situations and keep your business moving forward. The funding in series D comes from the same parties as in series C.
7. Initial Public Offering (IPO)
Initial Public Offering or IPO is the stage when a company wants to ‘go public’. This means that the company wants to offer corporate shares to the general public. This is not the end goal of any startup but comes into play only if a company wants to further raise funds for more success.
Through IPO, a company can allow the existing investors to exit by selling their shares to the public. Some may remain in the company whereas others might opt to exit by selling the shares in order to enjoy the perks of early investment. IPO allows a company to rapidly grow as it produces ample funds for the company and also helps you recruit top talent.
By going public, you will also be required to make your company more transparent. You need to share a lot of information with the public and also do additional reporting.
Valuation and fundraising of a startup in each stage
| Funding Stages | Company Valuation | Approx. Fundraising |
| Pre-seed | $10K to $100K | $50K |
| Seed | $3M to $6M | $3M |
| Series A | $10M to $30M | $15M |
| Series B | $30M to $60M | $30M |
| Series C and beyond | $100M to $120M | $50M |
| IPO | $100M in revenue | $50M to $500M |
Conclusion
For a startup, different stages of funding are available according to different needs. Right from the beginning to go public, these different stages are a reflection of the growth of a startup. These stages indicate the progress of a startup in its business. As an entrepreneur reaches the subsequent stages of funding, he or she clearly sees the success that has been achieved.
The later the stages of funding, the more are the needs. As such the value of funding in every stage keeps increasing. By understanding the different stages of funding, an entrepreneur can effectively strategize his or her business. He or she will be knowledgeable about how to raise funds for the increasing demand of the company. I hope this article guides you through the different stages of funding so that you can make your startup glow.
FAQs
1. Who are angel investors?
Angel investors are high net-worth individuals who provide funding to startups in exchange for ownership equity. They come in at an early stage and support the startup when it is relatively new and risky to invest in.
2. What is Venture Capital?
Venture Capital or VC is the funding provided by venture capital firms to a startup that has the potential of transforming into a big business. One gets access to VCs when he/she has proved the worth of his/her startup by exhibiting growth in its primary stages.
3. What is bootstrapping?
Bootstrapping refers to the process of making use of only existing resources such as personal savings and personal equipment for starting a business without any external aids. Bootstrapping opens the door to very limited resources as an entrepreneur does not yet have a proven business strategy for raising funds from investors.
