Creating and growing a startup today is a challenging task. The most important thing for a startup founder to do is to focus on creating the product, building a team, and attracting funds to develop the business.
No matter what stage of the startup life cycle you are on, financial resources are an essential part of keeping the business afloat. When you first start looking for ways to attract capital, it may seem extremely hard to do. Except for using personal or friends/family capital, there is an option to attract venture capital. If you decide to choose the second option, you will likely go through several stages of startup funding. Understanding the specific needs of businesses at each stage can help you see your pathway more clearly, engage investors with more confidence, and complete the rounds of funding for startups more effectively.
Startup Funding and How It Works
A startup is a company in the initial stage of its development. Startups are usually started by entrepreneurs to service a demand for a specific product or service. Such businesses involve high costs and bring low revenue from the start, which means that they need to look for ways to attract outside investors in order to grow and bring revenue. And there's a lot of startup lingo dealing with the financial side (Angel investors, bootstrapping, cliff vesting, seed funding, venture capital, equity, etc.).
So, how does startup funding work?
First, let’s have a closer look at the participants of startup funding. On the one side, there are the entrepreneurs who are trying to get funding for their companies. As the businesses grow, they move to different startup funding rounds. Usually, a company starts the startup funding process from the seed round and then proceeds to A, B, and C startup funding stages. They create a pitch deck to propose their offering to investors.
On the other side, there are potential investors. The investors support the business and help it achieve its aims, as they usually have partial ownership of the company (like in the case of a startup incubator or accelerator). So, if the company grows and becomes profitable, the investors get their reward.
Before the rounds of funding for startups begin, the company goes through a valuation process. The experts assess different factors during technical due diligence, like management, track record, market size, risk, maturity level, and perspectives for growth. These factors influence the types of investors that are likely to be involved.
Why Is Fundraising Important for Startups?
Attracting additional financing is crucial for a startup to be successful and reach a high level of competition. Fundraising activities help the business grow and become stronger, so here are some of the reasons why fundraising is so important:
- Fulfilling the startup's financial goals. Every business has its own financial goals that need to be met. And getting sufficient funding is vitally important to achieve them.
- Facilitating the company's development. All the new businesses that are just starting to function need to make sure that there aren’t any obstacles that hinder their development. Different funding and fundraising programs take care of that. The main aim of such institutions is to help companies on their way to success and remove the financial roadblocks they may face.
- Keeping up with the high standards and being competitive in the market. The increasing competition in the market today means that it has become vitally important to meet the existing standards. Fundraising allows the business to grow and keep up with the competition.
The Pre-Seed Funding Stage
The pre-seed startup funding stage is defined as the time when a startup is just getting started. This is the earliest stage of startup funding when the founders are trying to get their idea off the ground. The startup owners at this stage need to ensure that their product idea fits the market demand, go through proof of concept (POC), gather an effective core team, and build a minimum viable product.
The pre-seed funding can be obtained in a short time, though sometimes it can take much longer, depending on the business model and nature of the company. The most common funders at this stage are the founders of the business themselves, their close friends, relatives, and supporters. It is most likely that the investors do not get equity in the company in exchange for their investment.
The Potential Investors in Pre-Seed Rounds:
The most common investors in the pre-seed stage are:
- Entrepreneurs who are just starting their business;
- Family and friends;
- Incubators and early-stage venture funds (Micro VCs).
Startup Valuation in the Pre-Seed Stage
On the pre-seed funding stage, the value of startups ranges approximately from $10,000 to $100,000.
Active Pre-seed Stage Investors and Funds
Seed Funding Stage
Among the funding rounds for startups, seed funding is considered to be the first actual stage of startup funding. Most startups in the pre-seed stage fail because of the lack of funding and lack of market need. That is why seed capital is crucial to get the business off the ground.
This stage involves a huge amount of risk for the investors, so the startup owners must give the investors a stake in the company in exchange for their investment. This type of funding allows the startup to cover the initial costs of MVP product launch, marketing, hiring the key staff, and further market research. A lot of companies believe that the seed stage is all that is needed to get their business off the ground. However, finding the necessary funds is not the only thing that matters here – you shouldn’t underestimate the importance of product-market fit as well.
Potential Investors in Seed Rounds
- Friends and Family;
- Angel Investors;
- Early Stage Venture Funds (Micro VCs);
Startup Valuation & Fundraising in the Seed Stage
The startups that can attract investment at the seed stage usually have a business value from $3 million to $6 million. The companies can usually receive from $50,000 up to $3 million of funding for a promising startup.
Active Seed Stage Funds and Investors
Series A Funding Stage
Before moving to the next funding stages of a startup, the company needs to have a working product and a steady revenue stream. Series A funding is aimed at helping the business expand to new markets.
During the A-series startup rounds of funding, it is crucial to have a long-term plan of development. Many startups have great ideas but don’t know how to implement them in the long run.
It is very important at this stage to establish contacts with potential investors and venture capitalists. There is a 30-10-2 rule that implies that you need to find at least 30 potential investors, 10 of them may be interested in your proposal, and only two are actually going to provide you with funding.
Potential Investors in Series A Rounds
- Super Angel Investors;
- Venture Capitalists.
Startup Valuation & Fundraising in the Series A Stage
Companies on the A-series startup investment stages usually value from $10 million to $30 million. They are able to receive up to $15 million of investment if they have a good business plan.
Active Series A Stage Funds and Investors
Series B Funding Stage
The companies that have completed the previous stages of funding for startups (seed funding and Series A) already have an established user base and steady revenue. They have proven that they can become successful if they expand and work on a larger scale.
To do this they may need to attract additional funding at the Series B startup funding stage. This stage allows the businesses to expand and enter larger markets with a high level of competition. The main processes and key players on the series B stage are similar to those of the A series round and are led by mostly the same characters. However, there is a new wave of venture capital funds that focus primarily on investing in well-established startups so that they can grow even further.
Potential Investors in Series B Rounds
- Venture Capitalists;
- Late stage VCs.
Startup Valuation & Fundraising in the Series B Stage
Usually, the startups in the Series B stage value from $30 million up to $60 million and are able to raise approximately $30 million during the Series B funding round.
Active Series B Stage Funds and Investors
Series C Funding Stage
The companies on the series C funding round are already on a growth trajectory. Still, they are always looking for ways to get extra funding to expand their production, enter new markets, or even acquire other companies.
The Series C funding rounds for startups aim to help a company grow as soon as possible. The investors are happy to provide funding to a successful startup at the C series stage as they hope to gain profit greater than the amount they invested. Also, it is possible to use C-series funding in order to buy other startups to grow your business even further. Finding funding at this stage is easier in a way, as it is less risky for the investors to do so.
Potential Investors in Series C Rounds
- Late stage VCs;
- Private Equity Firms;
- Hedge Funds;
Startup Valuation & Fundraising in the Series C Stage
Startups eligible for Series C VC funding stages tend to value from $100 million to $120 million and can raise approximately $50 million during the Series C funding stage.
Active Series C Stage Funds and Investors
Series D Funding Stage
There are not many startups that need to go through this stage. The Series D stage allows the business owners to attract investment for a specific purpose, for example, a merger or fulfilling the growth goal. If a startup hasn’t yet gone public but is looking at an opportunity to merge with a competitor, it may be a good option to consider a Series D startup funding round. This stage is believed to be one of the best options for merging with another startup or using the growth potential to the full extent.
Potential Investors in Series D Rounds
- Late stage VCs;
- Private Equity Firms;
- Hedge Funds;
Startup Valuation & Fundraising in the Series D Stage
The companies in this round can value from $150 million up to $300 million and are able to attract approximately $100 million of investment during this stage of startup funding.
Active Series C & D Stage Funds and Investors
Initial Public Offering (IPO)
IPO is the process of public offering of a company’s stock to the general public. It’s one of the ways for startups and established companies to allow selling their shares to the general public.
When a company decides to go public, they need to go through several steps:
- Creating an external public offering team;
- Compilation of the information about the company;
- Audit of the financial statements;
- Filing the startup’s prospectus with the SEC (Securities and Exchange Commission) and setting the date of going public.
To Sum Up
All the rounds of funding for startups allow startup owners to scale their business at any stage of its life cycle. Understanding the differences between the startup funding stages will help you understand startup news and see which of the stages is suitable for you. All the funding rounds for startups work basically in the same manner – investors provide companies with funds in return for a stake in the business.
Technically, there is no last stage in the startup funding process; if a company has greater revenue goals, it may turn to series E, F, G funding, and so on. After the IPO stage, many startup owners choose to retire or become an angel investor to help other businesses grow and be successful, as they feel they have built a successful business and can now relax a bit.
We hope that this article helped you learn more about startup funding stages. The fundraising process is not a simple one, as it requires a lot of effort and attention. So it can be a good idea to hire an outsourced software development team while you are fully engaged in the fundraising process.
If you are looking for a development team that can help you implement your ideas at any stage of a product’s life cycle – our experts are always at your disposal. We have vast experience providing MVP development services for early-stage startups and team augmentation services for growth-stage businesses and are ready to help you. Contact us and browse the dedicated team pricing, we will give you a hand on the way to success!