A startup demands much more than just a great idea. It demands a lot of time, discipline, dedication, and most importantly, funding. Most startups go through various funding stages as they grow and try to become successful. Each startup funding stage has different requirements, conditions, and maximum amount of investment. This article will break down the different startup funding stages and explain what happens at each one. By understanding the various funding stages, you’ll be able to make better decisions about your business and its future.
Overview of major startup funding stages
The startup funding rounds have transformed the business landscape completely, over the past few years. Not long ago, the available startup fundraising options were few, but lately, we’ve experienced a surge for startup funding at different stages. As a budding startup owner, you must evaluate where your startup stands and how much funding can you raise from external sources. Before we discuss ins and outs of each funding stage, here’s an overview of major startup funding stages.
Now let’s delve deeper into different stages of fundraising in a startup lifecycle.
Pre-seed Funding Stage
This prime stage of seed funding falls so early that it’s not even considered as a startup funding. The pre-seed funding stage generally refers to the time period in which a startup is getting their operations off the ground.
It’s likely that investors won’t make an investment in exchange for equity in the startup during the pre-series stage. This stage can last for a long time or you can get pre-series funding in quick time. It depends on the nature of your startup and the initial costs that you must consider while developing the business model.
The pre-seed funding stage is commonly known as bootstrapping. In simple terms, it means using your own existing resources in order to scale your startup. Startup owners invest from their own pocket and try to grow themselves in the most resourceful manner.
During the development stage of the startup, entrepreneurs may have to work overtime or get a second job so that they can invest their additional income into their new startup.
During this stage, many entrepreneurs also seek guidance from founders who have been there and have gone through a similar experience as them. It allows them to determine the incurring costs of their idea or project, develop a winning business model, and garner ideas on how to grow their plan into an operating business.
Entrepreneurs should also work out any necessary partnership agreements, copyrights, or other legal issues during the pre-series stage as similar issues are best resolved during this stage. Later on, they might become expensive and even insurmountable. Also, no investor will provide funds to a startup having legal issues prior to their launch.
Potential Investors of Pre-Seed Funding Stage
The most common pre-series investors are:
- Startup Owners
- Friends and Family
- Early Stage Venture Funds (Micro VCs)
Startup Valuation in Pre-Seed Funding Stage
During the pre-seed funding stage, startups value anywhere between $10,000 to $100,000.
Seed Funding Stage
After the pre-seeding stage, it’s time to actually plant the seed. The first in the startup funding stages is “Seed funding”. Almost 29 percent of startups fail because they run out of capital while bootstrapping, which makes seed capital critical to get a business up and running.
You can consider the seed funding stage as an analogy of planting a tree. Ideally, the initial funding is the “seed” which allows any startup to flourish. When you provide appropriate water i.e. a successful business strategy, alongside the dedication of the entrepreneur, the startup will eventually grow into a “tree”.
Because the investors are taking a huge risk by investing in the business, startups must provide them equity against seed fundings. The stakes are even higher because, at this stage, startups cannot guarantee a successful business model.
Many startups consider the seed funding round is all that is necessary to successfully get their startup off the ground.
Potential Investors of Seed Funding Stage
The common types of investors who participate in seed funding are:
- Friends and Family
- Angel Investors
- Early Stage Venture Funds (Micro VCs)
Startup Valuation & Fundraising in Seed Stage
Startups that are eligible for seed funding have a business that values anywhere between $3 million to $6 million. The seed funding stage will facilitate funding from $50,000 up to $3 million for a promising startup.
Series A Funding Stage
Series A stage is the first round of venture capital financing.
By now, the startup must have a developed product and a customer base with consistent revenue flow. Now it’s time for them to opt for series A funding and optimize their value offerings. This is an ideal opportunity that allows startups to scale themselves across different markets.
In the Series A funding round, it’s significant to have a plan that will generate long-term profits. Many times, startups come up with great ideas that can generate a substantial amount of enthusiastic users, however, they do not know how to monetize it in the long run.
This is the stage where you must start learning how fundraising works and start making early connections with angel investors and VCs. Following the 30-10-2 rule, you must identify investors who would want to invest in your startup.
According to this rule, you must find 30 investors who are willing to invest in your business. 10 out of those 30 investors might show interest in your proposal, 2 of which will really pass on funds to you.
Series A funding mostly comes from angel investors and traditional venture capital firms. They are not looking for “great ideas”, instead, they are looking for startups with a solid business strategy that can turn their great idea into a successful, money-making organization, allowing the investors to reap the benefits of their investment.
A single investor may serve as an “anchor” but once a startup has secured its first investor, it’s easier to attract additional investors. Although angel investors prefer to invest during this stage, they tend to have much less influence than VC firms in this stage.
Potential Investors for Series A
- Super Angel Investors
- Venture Capitalists
Company Valuation & Fundraising in Series A
Startups with a good business plan valuing up to $10 million to $30 million are able to raise approximately $15 million during the Series A funding stage.
Note: Series B, C, D and IPO Funding Stages will be published in a separate post