Startup Funding Stages: From Seed to Exit
Although developing a thrilling business concept and using it to build a company sounds like a great plan, it’s important not to abandon a profitable job and career in pursuit of big money just yet. Aspiring entrepreneurs who want to try their hand at the business world should first take the time to learn about the various startup funding stages.
Explore how to finance your new venture from when you come up with a viable idea to the exit. Without this crucial resource, your company may not last beyond an initial couple of years. Acquiring relevant information can make the ultimate difference in getting funding at each stage of your venture. And ensuring its long-term success.
Before the Pre-Seed Stage
Like successful serial entrepreneurs will advise you, a new business starts with a discovery stage. At this point, you’re researching the market, potential problems, and product ideas that can be possible solutions.
You’ll interact with customers and control groups to test if your idea is worth pursuing. This research is accomplished with a minimum of money. At best, founders invest time and sweat equity into understanding what can and cannot work.
Pre-Seed Funding Stage
Once you’re confident about a great product idea, the next step in the startup funding stages is bringing it to life. In the pre-seed or bootstrapping funding stage, founders invest their money into developing a viable product prototype.
Having some skin in the game is a powerful motivation to make the venture work. When you’re ready to approach investors for funding, they will appreciate your commitment to the project. Many entrepreneurs make also take up second jobs to support their ideas.
In addition to sinking your savings, you’ll contact friends and family members for support in the early stages. Also, connect with colleagues and other informal sources of finance, for instance, crowdfunding platforms.
More than the business idea, your friends will invest in you and their confidence in your abilities. You’ll acquire the money you need without compromising your control of the company operations or the fear of dilution. Though there are no fixed cut-and-dried estimates, entrepreneurs can expect to raise anywhere from $100K to $5M.
Formal Pre-Seed Funding Entities
Other funding sources you can approach include channels like startup incubators, angel investors, and accelerator programs. Startup incubators and accelerator programs do much more than just fund the startup, they provide added support through infrastructure and mentoring to assist you in building a product prototype.
By the time you’re ready to exit the program, you’ll walk away with the opportunity to approach other investor networks. You’ll also train in pitching to industry-specific funding entities and hone your presentation skills for “demo day.”
Most founders have enough money in the bank to see them reach further startup funding stages. The most critical factor is validation that the business idea is worth backing. Accessing financing down the line becomes much more accessible and primarily relies on the company’s performance. This is why the pre-seed funding stage is often called the validation stage.
Seed Funding Stage
If you’ve reached the pre-seed funding stage, you have enough money to set up the venture. While you have a product prototype or MVP, you must develop the business model and go-to-market strategy. At these startup funding stages, you’ll need money to launch the product and invest in marketing and advertising efforts.
You’ll hire great talent and skill sets and build a founding team to launch the company. Also, complete the necessary research on the product-market fit, and work out tangible deliverables and milestones. Entrepreneurs ready to start marketing their products need an initial injection of capital but are yet to generate revenues.
However, you can expect to attract investments from venture capitalists, pre-sales revenues, debt financing, and angel investors. At this stage, you may have to draw up contracts and outline the terms and conditions for repayment.
Aside from a share in the company profits, investors may require equity in the new company instead of funding. Also, expect to cede specific rights if the investors offer guidance and technical expertise. You might want to accept this support since it has the potential to kickstart the venture.
Series A Funding Stage
Series A funding is typically the first venture capital financing round, though the company may not make much revenue. By this time, you should have a Minimum Viable Product and a customer base and be ready to generate sales.
You’ll open the company to investors and provide a valuation and pricing. Typically, Series A startup funding stages result in $15 million or more finance injections. Once you raise money, you’re ready to scale the business across broader markets.
When preparing for the Series A funding round, you should be ready with a long-term business plan for consistent profits. You can also contact previous investors to participate in the next round, and expert entrepreneurs recommend you go with the 31-10-2 rule.
List around 30 investors who might offer to fund, but expect only ten will likely show any genuine interest. Only 2 of the finalten0 will inject funding into your startup. Preparing for the Series A round well before you need more money to scale the venture is also advisable.
Investor Criteria and Entrepreneur Expectations
Most investors focus on criteria like a robust business strategy that can potentially convert the idea into profits. Other factors may include size, founding team, impressive unit economics, risk factors, performance, and skilled management.
Acquiring your first real investor typically sets the stage for attracting other top financiers who’ll display interest in your company. Think of entities like super angel investors. But, also expect to offer preferred stock instead of the funding you get. Remember, financiers wish to purchase around 10% to 30% of the company.
Once you complete this startup funding stage, your company should have adequate working capital for six to 18 months. When estimating the amount you need to raise, calculate how much you’ll need to meet your objectives before it’s time for the next round.
Series B Funding Stage
Companies going through startup funding stages are ready for Series B when they have a robust customer base and an assured revenue stream. When you’re ready for funding to expand further, you’ll initiate a valuation to raise the Series B stage. Typically, venture capitalists and later-stage VCs invest in Series B.
These investors have seen your venture’s performance and are confident of its success and scalability. On the face of it, this funding round is not all that distinct from the ones you’ve executed before. The critical difference is that you’ll raise financing from investors who bank on older, established startups with lower risk. At the same time, you’ll have more negotiating power.
Entrepreneurs divert the funding they acquire toward rapid growth to meet customer expectations and demands. You’ll ramp up activities to overtake the competition and increase your market share. Savvy founders and experienced investors understand the value of skilled founding teams.
Although you have an excellent team, the Series B funding will help you expand your needed talent. You can add operational skills like marketing, advertising, and business development.
Using the funds, you can stabilize the company and scale to capture new markets while dealing with ongoing, short-term challenges. However, prepare for the dilution of the company with startup funding stages.
Series C Funding Stage
Entrepreneurs considering Series C funding run flourishing companies that are thriving and doing well on the growth path. Your objective behind more finance is to research and ideate new product lines and services.
You’ll want to capture new markets, venture into similar industries, and perhaps, acquire smaller startups. You’re ready to buy out competing businesses, and your company is well past the startup stage. Finding the finance for each new project is a cakewalk.
Since you’ve overcome the risk factor, more investors will be lined up to invest in your company. These entities may include investment banks, private equity firms, hedge funds, etc.
You may also have new and emerging investors offering finance since they prefer to follow leading investors. They’ll back winning brands with a long track record of outstanding performance, success, and profitability. Your company needs a robust customer base and proven and stable revenues to acquire Series C funding. Global expansion and markets are also criteria.
Series D Funding Stage
Most companies don’t reach the Series D funding stage. Or, they may not progress to Series E, F, or further. Entrepreneurs pitching for more finance typically see a fantastic, not-to-be-missed opportunity with the potential for rich returns. They may explore this option before taking the company public with an IPO.
Alternatively, the company may have missed meeting its objectives for the Series D round. The founders may choose to get more money to accomplish what they set out to do. Then again, you may opt to get more funding before entering into a merger with a competing company.
As with other startup funding stages, you’ll have the company valued before reaching out to investors. At this stage, companies typically value $150 million to $300 million, aiming for funding worth $100 million or more.
The most viable options for Series D funding are late-stage VCs, investment banks, private equity firms, and hedge funds. However, know your company could have a lowered valuation if you want to raise capital to meet unfinished goals. This factor could shake investor confidence and make it harder to get financing.
Series E & F Funding Stages
Although unusual, companies make it through Series E, F, and G stages. Reaching these stages typically indicates that the company is floundering and needs help generating its capital. You might be able to get funding, but you should prepare for excessively diluting the company’s equity and valuation. Investors at this stage could be wary about offering to finance.
Mezzanine Funding & Bridge Loans
These loans are typically geared toward companies worth $100 million and above. Mezzanine funding combines debt and equity for investors, while bridge loans are short-term loans.
Both forms are made out for six to 12 months, and the money diverts toward meeting the expenses of an IPO. Founders cover these loans and the interest accrued with the IPO proceeds. If not an IPO, the funds may also help in a merger or acquisition of a smaller or competing venture. You might get these loans to cover the gap to a successful IPO.
Exiting with an Initial Public Offering (IPO)
An IPO is the veritable culmination of the startup funding stages journey. By issuing an IPO, founders take their company public and offer its shares for purchase in the open market. The funding from the IPO goes toward further growth or allows the owners to sell their equity stake in the company. That’s how you’ll exit the startup.
Investors may choose to retain their stock for future realization or sell out. Employees owning ESOPs can also profit from the sale of their stock options. Once companies are public corporates, they can use their shares to acquire other companies. Your startup is now a fully functional, independent entity with an appearance on a registered stock exchange.
Raising capital is a consistent process that each founder must go through as their startup progresses from the ideation stage to the final exit. You’ll need finance to navigate your entrepreneurial journey and ensure the startup funding stages proceed without snags.
However, raising funding can take a lot of time and effort. Do the necessary research to understand how fundraising works and how each stage sets the foundation for the next. That’s how you’ll achieve your mission and vision for the startup, eventually culminating in an impressive exit.