Financing is one of the earliest and most challenging steps when it comes to starting a business venture. From investing in several prototypes to hiring a team, it may cost a fortune to execute your business plan. But that’s where startup financing options come into play.
Those new to the startup industry may have heard the term ‘seed funding’ once or twice. This is a series of funding stages often offered by established venture capital firms, private equity firms, and angel investors to provide startups with seed capital in exchange for an equity stake in the company.
After the early stages, each funding round usually takes a letter starting from ‘A’ and even up to ‘E’ on certain occasions.
In this article, we’ll be going through the different funding stages in greater detail to give you an idea of how you can get your business idea off the ground.
Pre-seed funding is commonly known as the first early-stage round of financing. For those with prior experience with starting companies and building investor relationships, you may easily consider taking on venture capital funding at this stage. However, pre-seed funding is generally raised from private sources such as family and friends, personal savings, crowdfunding and even taking on an early-stage business loan.
This is where your business idea is only in its conceptualisation or prototyping stages. Pre-seed capital is often used to cover direct startup costs such as incorporation fees, office space, payroll and inventory, as well as exploratory analysis like market research and product development. While it may not be formally included among the financing rounds, the preparation for this stage is extremely crucial and can either make or break your business concept.
If you are in this stage, take this time to polish up and develop fool-proof prototypes that will potentially attract investors in future financing rounds.
You’ve finally reached the first equity funding stage. Think of seed funding as the first step in your journey towards official startup financing.
Common signs and incremental changes that indicate your progression from the pre-seed to seed funding stage may include:
At this point, you may have already ticked off some of your boxes from the pre-seed stage. You may have built a team, gone past product conceptualisation and finally have something to show off but still need additional financing from investors.
Apart from angel investors, startup incubator and accelerator programmes run by venture capital firms are also among the most common options for early-stage financing. In return for investing in your startup, investors will typically take an equity stake in the startup. If your goal is to have full ownership of your company, this is something worth considering.
As your startup gradually picks up during the seed funding stage, founders can use this time to start looking into business finance solutions like opening an account to get started - it's just as important as seeking funding.
After exemplifying an actionable business model with high growth potential, startups are ready to go into Series A funding. At this juncture, your startup should be effectively satisfying a market need, have strongly identified its target market, and have a valuation in the millions. However, some companies may need additional funding to scale their product across different markets abroad and to further develop their product offerings to generate long-term profit.
To obtain Series A funding, start by calculating the valuation of your company to help potential investors and stakeholders determine value-generating areas of your startup, which ultimately persuades them to invest. Business valuation can be done by conducting a discounted cash flow analysis or reviewing financial statements.
Some startups may exit and conclude their seed funding journey at the Series A rounds. But for businesses in niche sectors that may need to raise more capital, Series B funding is the next step. Reaching this stage indicates that your startup isn’t just generating sales and revenue but also gaining significant profit.
The only difference between Series A and B rounds are the expectations presented by investors and the amount of capital raised. Appeal to investors by presenting a new and updated business valuation accompanied by detailed past accomplishments. By demonstrating confidence, it gives them more assurance that their investment will yield promising results.
Startups that make it to Series C rounds have already matured significantly and are past the development stages. Capital raised in this round is generally used to grow exponentially by expanding to other regions, developing new products, and even acquiring another company.
The number of financing rounds your startup goes through is largely dependent on your business needs and personal preferences. Due to the nature of their business, certain companies may no longer require additional rounds of funding due to their profitability. Others may still need several rounds of investor finance to further expand their operations.
As a founder, ensure that you know your exit strategy well while making the most out of the resources available to you.