Let’s get into startup funding stages and how and when to approach potential investors.
At many stages, the all-important question for a startup founder is: where will the external funding come from? And more importantly, how much will you need? As any seasoned investor knows, there are several different sources – and plenty of ways to get it wrong. In this post, we describe the most common startup funding stage and break down the strategy for each stage.
Finance and time are critical in the startup process. Without them, you’re powerless. And when it comes to finding money, there are several different sources to choose from ( public offerings, private companies, investment banks, private equity firms, Angel Investors) – each with its pros and cons. Here’s an essential guide on the most common startup funding stages and how to go about selecting the funding options that are right for you.
Pre-seed Stage
A pre-seed funding stage is an early, small injection of capital to help a startup get off the ground. A good pre-seed investment usually is about $500,000 – and for this, you’ll likely get about 10% of your company. Best for Early-stage investors who believe in a startup’s vision (mostly Business idea) and want to see it come to life. Often pre-seed rounds are led by angels who wish to look at promising companies in this development stage.
Pre-seed funding round checklist
- Pre-seed investors will provide technical expertise – typically operating systems, networking, or other relevant things to the startup owner.
With Pre-seed money, your can start building the company ( testing the market and the business model). You can use it to hire staff, purchase equipment, integrate a product with another software development platform or launch a beta version of your website. But once you leave this stage, you’ll need to move quickly.
Startup funding stages: Seed Stage
A startup’s seed round is when the real money comes in. A typical seed round is $1.5m but can be as high as $3m if you want to make a splash. Best for: Investors with a strong belief in a startup’s product and potential to grow into something big. Seed funds usually come from venture capitalists and angel investors who are familiar with the startup community – and particularly those who have worked with other startups similar to yours in the past.
Seed funding round checklist
- Your company should have at least one investor who has helped out in the past, such as an angel investor or a venture capitalist. This gives a founder confidence that their idea is not so far-fetched and will make it easier for the investor to make decisions about further fundraising.
- There should be a clear business plan for how the money is spent; it may also be essential to get institutional investors on board before raising seed funding. This is because, if you were to raise a Series A round, the investors would need to buy into your “road map” and provide further funding.
A seed round can allow staff and customers to get involved with the startup’s development. Because of this, seed money is often used for hiring staff and start-up expenses such as set-up costs for a new office or equipment. Seed money is also often used for a prototype or beta version of the product.
Typically, these are the last resort – as people tend to use seed funds not only for hiring talent but also for product development.
Startup funding stages: Series A stage
A Series A round is your first opportunity to raise a significant amount of additional funding. Best for: Companies that have gathered enough momentum in the market (reach product-market fit and start to get a market share) and have built significant traction among their customers. It’s in your interest to focus on getting your product or service to a stage where it can be proven to be used by customers – and preferably that it generates revenue. Series A funding is often used to set up a production line for new technology, expand the product into new markets, or develop marketing strategies and promotional activities.
Series A round checklist
- Your startup shouldn’t just have traction but also good figures. Sales figures for the previous 12 months are a good indication of how far you’ve come since your startup began. And when it comes to getting sales figures, some startups like to make their products easy to measure – such as launching an analytics package that enables customers to track downloads and determine which features are the most in-demand.
- A detailed marketing plan is essential for a company that wants to take its product from the concept stage on the road.
- R&D can be a significant expense for successful startups, especially hardware products. However, spending at least as much on this stage is essential as you spend on the product itself. The benefit is that when you’re able to prove that the product works, investors are far more likely to fund the business development.
Startup funding stages: Series B Stage
The next step up from a seed round is a Series B round. Best for: Companies with revenues and growth in the number of users. This funding can continue developing the product and market it to a broader audience. An important consideration for investors is how it will affect your overall valuation – so investors are looking to see how your revenues and profits compare with those of your peers in the space.
Series B round checklist
- Your startup should have at least one investor who has helped out in the past, such as an angel investor or a venture capitalist. This gives a founder confidence that their idea is not so far-fetched and will make it easier for the investor to make decisions about further fundraising.
- There should be a clear plan for spending the money; it may also be essential to get institutional investors on board before you raise seed funding. This is because, if you were to raise a Series A round, the investors would need to buy into your “road map” and provide further funding.
A Series B round can develop the product and market it to a broader audience. Series B funding is often used for market development and R&D, and product improvement. It’s also used for the internationalization of services and scaling up operations.
Startup funding stages : Series C stage and beyond
While a series A or series B round is usually enough to get a startup off the ground, eventually, most startups will need more money (Generate Revenue Growth by scaling or expansion) and seek more financing rounds from additional investors. This can come mainly in two forms: debt financing or venture capital.
Debt funding
By borrowing money from bank loans or institutional investors, debt financing is a strategy that can save you money over equity rounds. Debt financing is usually attached to an asset, so it’s more attractive for investors: If your startup goes bust, the businessman who loaned you the money owns the assets. As a result, this type of funding is often used for startups with physical assets repossessed.
Debt funding can be used to fund a wide range of startup needs, from R&D to advertising and marketing. Debt funding is also often used for products that generate income but don’t work at scale. It may also be used for costs incurred by the company until debt funding is requested.
Venture capital
Venture capital firms are types of investors that venture firms use. Mostly Venture capital financing will typically invest in a startup after getting a detailed business plan from the startup and analyzing different financial aspects. This can take the form of an investment letter or white paper and more detailed financials, which include the complete set of financial statements for the entire company for at least two years – including accounts, balance sheets, and profit-and-loss statements.
One of the advantages of venture capital is that it typically comes with no strings attached. However, investors will usually want a stake in your business, which means ceding control to outside forces. Moreover, venture capitalists don’t just focus on funding startups; they also aim to buy them up later.
The funding raised in later rounds depends on how much funding was raised in previous stages and the current needs.
