Startup Funding – Different Stages [Explained]

Startup Funding - Different Stages [Explained]

In this article, we are going to have a look at the different stages a business goes through and the different ways the business can raise capital in order to grow.

In the lifetime of a business, there are various stages that almost all companies have to go to and the type of investments for each and every single step is not similar. Following are the stages of investment funding for businesses, keep in mind that these stages are named differently by different people but the main idea behind when the stage starts and how the company operates at that stage are the same. At first, you have the “pre-seed stage”, it is also known as the idea stage, in this stage, you do not have anything but the idea for what you are going to do. In this stage your idea is going to take a tangible form, there are two main ways of financing the business in this stage the first one is “bootstrapping” and the second one is through “friends and family”.

Bootstrapping means doing something by yourself, in this context, it basically means financing your venture by yourself. Entrepreneurs often have savings that they are planning to use in the future. These savings often get used at the pre-seed stage of the investment, the second way is to friends and family, most people take loans from the people closest to them, convincing them about the potential of the success of the business. The loans that come from friends and family are not as dangerous as other ones as your family members are not that likely to claim a percentage of the business to themselves they might just want to see you succeed and they will be happy if you return the money within a reasonable amount of time. There are also some “angel investors” that are likely to invest in the pre-seed stage, but that is quite rare. The amount of money to be collected during this stage is arguably somewhere between $200,000 to $500,000. Just because I said that there are two main ways to gather financing in this stage does not mean that these are the only two ways. You can go for “Angel investors” and “Venture capitals” at this stage as well that is if your network is strong enough and the idea is firm, but the norm for this stage is bootstrapping and family and friends.

After that you have the “seed stage” this is the first official stage of funding for a start-up. Before I start talking about this stage I would like to talk about a fun fact of this stage, the fun fact is most startups do not grow out of this stage to gather financing for the next rounds, meaning that most startups fail at this stage and every single good entrepreneur know about the high failure rates in startups. This stage is very aptly named, this is where your idea starts to take a physical form, you are just starting out by planting the seed and the seed is likely to grow into a big and beautiful tree.

After getting the seed funding, companies are most likely to spend it on product development and market research. This stage can also be funded by the founder team along with their friends and family, but there are other ways one can raise capital for a business in this stage. Apart from others, you can get to angel investors for financing, these are people that do not necessarily associate with any venture capital's but do provide financing for various types of businesses.

You can also do it through startup incubators, although not that popular and widespread choice but still a choice and there are some early-stage VC’s that can provide funding for a company in the seed stage, but it is still rare for a venture capital to fund a company at this stage.

Another way of raising capital in this (seed) stage is through crowdfunding (We will learn about all other types of ways you can raise capital in detail, in our next part of Startup Funding series, but for now you'd only get to know about the stages and during which stage a company should go through which way) So in this stage, the extra ways of financing you get are:


1)      Early-stage VC

2)      Startup incubators

3)      Crowdfunding

4)      Angel investing


The approximate amount of money in this stage is somewhat lower than two million dollars

 

After that, you get to see Series A, Series B and Series C.

Sadly there is no plant or tree stage. These are three different stages of financing but I am talking about them all together because there are not too many differences between these stages. Obviously, A will come before B and B will come before C.

 

Series A comes after the business has started operating in the market, you already have a version of your product in the market and there are people that are interested in buying it. This would mean that you are somewhat successful in the market and you are also gaining market share, the revenue of your company is either steady or growing, now it is time for Series A funding. The investors in Series A are not going to be looking at the idea at this point, they are going to focus on how you plan to navigate your business in the market. The strategies are important here, you need to show them the business model you have prepared that will help your business grow and make money. The amount of funding a company can get for Series A would be somewhat between 2 million to 10 million dollars. The main types of investors you are going to get in Series A, B, and C is going to be venture capitals and some rare angel investors. These people are definitely going to want a portion of your business for the investment.

 

In Series B and C, the companies are absolutely well established, but the reason why companies require funding in each series is different, the company needs to increase his market reach and go for a larger number of customers. The companies might need money to merge with another company or acquire another company. Merger and acquisitions likely happen in Series C. (There are not too many details to get to know about each of these series that is why I summed up all of them together in a single section)

 

Now the last stage has to be “Exit”


After a successful run, there will be a time when you need to exit the market. Exit strategies are usually merging with another company or getting acquired by someone else and the bigger exit strategy is going to be going public in other words IPO (the full form of IPO being initial public offering). IPO means that you are going to release the stock of the company to the general public and then your shares will be exchanged in the stock market. Keep in mind that providing your shares in the market does not always mean you are exiting from the company, sometimes growing companies can issue its share in the market if they feel like they're in the need of financing and going public is a viable option. But going public can be used and often is used by existing owners to sell off the shares they own to the general public and to be relieved from the ownership. Initial public offering is not just an easy process to go through you will definitely need help from underwriting firms or investment banks that are going to help you with determining the value of the shares that will be sold, the types of stocks you’ll be selling and the numbers of shares you will be selling.

 

More on that later, but for now it is the end of the discussion for today, comment below if you want me to elaborate on any of these things I have discussed in the article and I'll make those topics a priority.

 

So that’s it for today. Thanks for reading and do comment your email id below in the comment box, so that we can add you in our subscriber's list and you will be updated whenever we publish our next article.

 

Till then, Take care!


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