Various Stages of Funding for Startups and Funding Options

Explained various Stages of Funding for Startups and Funding Options from Angel Investor to IPO Stages a

Various Stages of Funding for Startups and Funding Options

Various Stages of Startup Funding and Investment rounds

A startup always needs more than just an idea; it also needs a lot of effort, dedication, focus and, of course, money.

More than 60% of businesses need outside investment. For instance, the average cost of building a platform in the US is $75,000, which is too expensive for most business owners. When raising money, it's important to understand the differences between different funding rounds and various types of investor groups.

Startup Funding Rounds

First of all, no matter how alluring it may sound, you cannot just get a business loan or a significant sum of money and feel safe and pleased forever.

To prove that your idea deserves the investment, you must go through numerous funding rounds, conquering different challenges each time. The goal of each round, which might run up to a year, is to raise enough cash to allow the company to grow. However, many business owners try to fit everything into a schedule of six or even three months.

Startup fundraising rounds are divided into the following categories based on their goals:

  • Pre-seed/Seed/Angel Round
  • Series A, B,& C....
  • IPO

A) Seed Stage / Angel Funding

When founders are attempting to give their idea the first push and frequently invest their own money, this is known as pre-seed funding.

The Seed stage comes next, during which founders entice purported angel investors. These people contribute money for more research, market needs testing, team hiring and the beginning of production.

YCombinator, 500 startup, SV Angel, and Techstars are a few of the well-known businesses that are taken into consideration for this round.

B) Series A

Series A financing (also known as series A round or series A funding) is a stage in a startup's capital-raising process. The series A round is essentially the second stage of startup financing and the first stage of venture capital financing.

Series A financing, like seed financing, is a type of equity-based financing. This means that a company raises the necessary capital from investors by selling its stocks. However, most series A financing includes anti-dilution provisions. Startups typically issue preferred shares, which do not include voting rights.

Venture capital Startups are the typical investors in this market, and they ask entrepreneurs to produce actual data and results from earlier investments. They want to see the startup grow into a successful, money-making machine that is equipped to expand and advance.

C) Series B

Round B encourages the start-up of new companies.

They are currently developed, have a substantial user base, and are looking for cooperation at the VC level. This stage is concerned with growing the team and looking into new markets.

Some of the biggest investors in this field include Sequoia Capital, Insight Venture Capital, and Accel.

D) Series C

Round C proposes a far higher degree of expansion.

The companies are already profitable, with a valuation of at least $100 million and are looking for a comparable sum of money. One of the final fundraising stages, Round C deals with both broadening the project's scope and creating new products. Get ready to work with the largest venture capital and the most demanding corporate investors.

E) IPO

Initial public offering (IPO) is the process of making a private company's shares available to the general public and is the last phase of a startup's life.

This enables access to a sizable quantity of capital on the open market as well as a higher degree of transparency. However, since you now have to deal with shareholders in addition to investors, it also entails more complication. You should anticipate that such partnerships will take a lot of work and be difficult and expensive.

To be successful, startup fundraising takes a lot of work and a solid plan. Understanding each round will put you ahead of rivals who only scan the market for passing investments.

Sources of Startup Funding

You, as the founder or CEO of a business, should have a thorough understanding of the various types of investments before actually obtaining money.

In this sense, there are seven main alternatives:

1. Bootstrapping

Sometimes referred to as self-funding. A business strategy and proof of concept are ideal for the early phases, when you are just starting started and have enough cash to meet your immediate demands. These two items turn into your main resources for obtaining future investments, and the costs are rather low and may be paid out of pocket.

Bootstrapping has the advantage of tying you to the firm by requiring you to invest your own money, which is valued by investors in later stages. However, this is not a solution for large startups or startups that want funding right now.

2. Crowdfunding

The potential of the internet is limitless. Because it doesn't take much to get started, crowdfunding has grown to be a well-liked method of raising money. In contrast to a conventional business strategy, here customers "pre-order" your goods before you've even begun to create it. After that, you construct the actual product with the funds you raised.

On sites like Kickstarter or Indiegogo, a multitude of little investments from different people might serve as a solid foundation for your startup idea. All you have to do is persuade them using your business plan, a prototype, or a video in which you outline your objectives, schedule, and milestones. This is still a fantastic technique to sell your product, even though there is always a chance that your idea will be stolen.

3. Incubators and accelerators

Early-stage startups can benefit greatly from accelerators and incubators. They are common in most major cities and are run by VCs, government agencies, and universities. Each year, they assist hundreds of small enterprises and they strive to provide infrastructure, networking, marketing, and financial support to a startups during its early phases.

4. Angel investors

Angel investors are people or organizations that provide money to potential startup in their initial phases. Angel investors can coach your company for good equity to offset the risk and are on the lookout for potential IT unicorns like Google and Alibaba (usually up to 20-30 percent ).

They assess the product's marketability along with the technical team and the first adopters. It's not simple to attract an angel investor and demonstrate the potential of your firm. Before reaching out to AngelList investors in your industry, you must create a killer pitch, an impeccable business plan, and a proof of concept.

5. Venture capital (VC)

Here, founders may gamble significant sums. Scalable, high-potential businesses are funded through venture capital, which is a term for professionally managed funds. Small businesses that are already profitable can expand with their assistance and skills. But VC investors often plan to recover their investment within three to five years. They wouldn't be lured to companies that need more time to reach the market as a result.

VCs look for companies with a good plan, a dedicated staff, and a need for strong leadership and control. It might not be the best option for you if you don't feel at ease with that.

6. Bank Loans

A bank loan is the most obvious source of funding. To give business owners complete control over their operations and to assist short-term funding, banks provide a range of loans. In addition to a comprehensive business strategy, bank loans at that demand a significant quantity of paperwork, a demonstrated track record, and strict restrictions. Examine the interest rates and the available collateral before deciding on this course of action.

7. Government Programs

Unlike business loans, small government grants do not need repayment and are typically accessible to startups in the research, technology, or healthcare industries. If your startup or business engages in scientific, environmental, or research endeavors, government programmes may assist with some of your costs.

Conclusion

Now that you know whom to contact at each startup funding stage, it’s time to think about ways to convince investors to give you money.

Keep in mind that finding investors is a time-consuming process that requires your constant attention and daily follow-ups. Therefore, attend conferences, meetings, email and call potentially interested investors, build relationships, and repeat.

About Jordensky

At Jordensky, we specialize in accounting, taxes, MIS, and CFO services for Startups and growing business and are focused on delivering an experience of unparalleled quality.

When you work with Jordensky, you get a team of finance experts who take the finance work off your plate – ”so you can focus on your business.”