There is no easy way to raise money for a new company. The process of raising capital can take months or even years for some businesses, while for others, it can be completed in a matter of weeks or even days. Many people look for outside funding to meet their needs, while others try to fund their ideas themselves. This article will give you a better understanding of the different startup funding stages and how funding plans work.
Funding Stages in Startups
No matter how small or large, every startup needs money to bring its innovative ideas to fruition. Most businesses fail because they are unable to raise the necessary capital. When it comes to running a business, you’ll always need some money or capital. As a startup novice, you must familiarize yourself with these stages before you can begin the process of raising funds:
- Pre-seed funding
- Seed funding
- Venture capital – Series Funding
- Initial public offering
Understanding Startup Funding
Almost all businesses begin as small enterprises. Some small businesses continue to thrive as they serve their local communities and fulfill the aspirations of their founders. On the other hand, others continue to grow at a steady pace because their owners reinvest their profits and keep expanding their services. Those businesses with the potential for rapid growth if they have the necessary capital and leadership are another type of small business. This group of companies is typically referred to as “startups” and they can achieve their full potential with startup funding.
How Does Startup Funding Work?
There is a brilliant business plan that wants to take off. Friends, family, and the founders’ own financial resources have helped the company grow steadily. As the company’s customer base expands and its operations and objectives evolve, so do the company’s resources. When the time came to raise new offices, staff and even consider an initial public offering (IPO), the company’s value had quickly surpassed that of its competitors.
Most successful startups have raised capital through multiple rounds of external funding, except for a few lucky ones that grow using the above model (with little or no “outside” help). Outside investors can participate in a company’s growth by putting money into the company in exchange for a equity in the company. As a business grows, so does the amount of money it receives from investors.
Depending on the industry and investor interest, startups may be eligible for additional funding rounds. Angel investors are a common source of “seed” funding for new businesses. If necessary, Series A-C rounds and other efforts to raise capital can follow these funding rounds. One cannot rely solely on the generosity of one’s friends, family, and one’s own savings to sustain themselves.
Why is Fundraising Important for Startups?
As a result of funding and fundraising, a startup can rise to the highest level of competition within the corporate world. Startups need to use fundraising activities in order to keep their business going strong. The following are the importance of funding a startup:
- Achieving a startup’s financial goals – Every new business has financial objectives that must be met. As a result, obtaining funding is critical if the goal is to be met. This funding process should be completed in a timely manner so that financial tasks can be planned straightforwardly.
- Eliminate obstacles in your path to success – All new businesses starting up must make sure that their development is not hindered in any way. Using funding and fundraising programs can guarantee this. Keeping an eye on these programs is important because they are used to raise and manage startup capital. The goal of these fund-raising and funding initiatives is to remove all financial roadblocks in the way of startups’ success.
- Keeping up with the high standards of business and the fierce competition – Increased competition in today’s marketplace has become critical that you meet the requirements of the corporate world. As a result, efforts to raise money and funding should be made to raise the bar in the business world. Funding and fundraising work together to help businesses grow by raising the bar for startups in the face of increasingly fierce corporate competition.
Funding Stages in Startup
Over the past few years, startup funding rounds have completely reshaped the business landscape. Startup fundraising options used to be scarce, but in recent years, we’ve seen an increase in the number of options for funding at various stages of the startup process. It’s important to assess the current state of your startup and how much money you can raise from outside investors as a new entrepreneur. Here is a list of the most common startup funding stages.
Before seed funding, the pre-seed stage is generally defined as the time when a startup is just getting started. Pre-series stage investors are unlikely to invest in exchange for equity in the startup. Pre-series funding can be obtained in a short period of time, or it can take longer. Your startup’s nature and the initial costs must be considered when developing the business model.
The term “bootstrapping” is commonly used to describe the pre-seed funding stage. Using your own resources to grow your startup is a simple definition. In order to grow their businesses, startup owners put their own money into the venture.
Investors in pre-series stage companies include:
- Entrepreneurs just starting out
- Family and Friends
- Incubator and Seed Capital Sources (Micro VCs)
Seed funding is the first stage of startup funding. Most startups fail because they run out of money while bootstrapping, so seed capital is essential to get a business off the ground and running. In order to secure seed funding, startups must give investors a stake in the company in exchange for their money.
Venture capital funding becomes available once the company’s final products or services are on the market. However profitable the products are, every business considers going through this stage, which involves multiple funding rounds:
- Series A – The startup should have a working product and a steady stream of revenue from customers by this point. Now is the time for them to take advantage of series A funding and improve their value proposition. Taking advantage of this unique opportunity, startups will be able to expand into new markets. Having a long-term profit plan is critical in the Series A funding round. Many startups have great ideas that can attract a large number of enthusiastic users, but they don’t know how to monetize them in the long term. During this phase, you should begin to gain experience in the fundraising process and begin to establish contacts with angel investors and venture capitalists. The 30-10-2 rule states that you need to find VC investors who are interested in investing in your startup. According to this rule, you must secure the support of at least 30 potential investors. A total of 10 of those investors may be interested in your proposal, and of those, only 2 will actually provide you with funding.
- Series B – Series B funding allows startups to expand and better meet the needs of their customers while also enabling them to compete in markets with high levels of competition. However, while the process and key players may be similar to the previous funding stage, series B funding is often led by the same characters, including a key anchor investor who helps attract additional investors. Despite this, there has been an increase in venture capital firms that focus on investing in well-established startups to help them grow even more.
- Series C – When a startup reaches the series C round of funding, it should be on a growth trajectory. These startups are always on the lookout for new sources of funding that will allow them to expand their product lines, expand into new markets, or even buy out other, less successful companies in the same industry. Investors are happy to provide funding for successful startups in the Series C funding stage. They hope to make a profit greater than the amount of money they put into the venture. The Series C round of funding goal is to help the startup grow as quickly as possible. You can use the Series C funding to acquire other startups in order to grow your business significantly. Investing in your startup is easier now that it is less risky to do so. Investment banks, hedge funds, and private equity firms are all eager to invest in your company at this stage.
- Series D – There aren’t a lot of startups that need to go through this process. It is possible to raise funds for a specific purpose at the Series D stage. For example, if it hasn’t yet achieved its growth target. If a startup hasn’t yet gone public but is considering a merger with a competitor on mutually agreeable terms, it may want to look into series D funding. Venture capitalists see Series D funding as the best opportunity to merge with another startup in order to address issues head-on.
Initial public offering(IPO)
The public offering of a company’s stock to the general public is known as an IPO. It’s common for startups in need of funding and established companies to use this process to allow startup owners the opportunity of selling their shares to the general public.
Want to Find Your Business’s Value?
An entrepreneur can use the various startup funding stages to grow their business at any point in their entrepreneurial journey. You should keep in mind that, in order to secure funding, startups must meet certain requirements. Eqvista can help you identify the net worth of your startup and will show you where you stand. Get a compelling business valuation for funding rounds with Eqvista!