As startups require capital throughout their life cycle, founders must be familiar with the various fundraising stages. Carefully evaluate the startup financing stages your business needs, and the management team’s qualifications. Also, consider creating a solid marketing plan.
Startups should be vigilant about the funding rounds they undertake, which are generally based on the company’s current maturity and development. However, starting a business doesn’t necessarily mean you need unlimited funding. A poll done by Kabbage shows that 58% of small businesses started their ventures with less than $25,000, while a third started with less than $5,000.
Let’s take a deeper dive into the different startup funding stages.
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Pre-Seed Funding
As the first of the stages in startup financing, some people refer to pre-seed funding as ‘bootstrapping’. In many cases, founders invest and provide most of the business finance. Friends and family members can also be involved.
This startup funding stage typically enables companies to hire early staff. They will help find the right product for the market and try several marketing strategies. At the same time, research and development are continuing, while some projects might already have a working prototype.
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Seed Funding
The time when a business receives its first source of funding is called seed funding. This startup funding stage is crucial to launching the business since nearly 29% of companies fail because they run out of money during bootstrapping.
With the seed funding, the company will be supported in identifying its initial product and target market. If you don’t have one, focus on an MVP with your raised funds.
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Series A Funding
In the Series A round, it is critical to have a business model that will generate long-term profit. Many companies that have received seed funding frequently have fantastic concepts but are still determining how they will monetise the business.
Start becoming familiar with the startup funding process and establish contacts with investors who can provide funds. Find 30 investors interested in funding your firm under the 30-10-2 rule. This rule states that among those 30, 10 may be interested in your concept, and 2 of them will actually give you money.
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Series B Funding
Late-stage investors and venture capitalists typically join the startup financing bandwagon in the following startup financing stages. The business is currently expanding after demonstrating to investors that it can achieve success on a much broader scale.
Investors who provided the previous startup funding may also provide Series B funding. In any case, the company’s valuation will have increased compared to many other startups. Investors would often pay more for a smaller percentage of the company’s equity than they did in previous funding rounds.
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Series C Funding
A business can be said to have already done well if it has received Series C funding. When a firm raises this funding, it is already established and expanding. Unlike earlier startup financing stages, the purpose of Series C funding is not to help a startup gain traction and develop.
Successful startups attract investors. They expect to make a profit that exceeds their initial investment. The business then raises money in D, E, F, G, and so on. There is a 1 in 100 probability of failing at this rate. However, only a few businesses are receiving Series F funding.
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Initial Public Offering (IPO)
The last of the startup financing stages is an IPO. Selling corporate shares to the general public is a choice if you have raised money through the earlier stages and want to grow even more. But remember, this is only the ultimate objective of some startups.
A business must establish an external public offering team of underwriters, attorneys, and certified public accountants to gather all the necessary administrative and financial documentation when doing an IPO.
Every round of startup funding opens a significant opportunity for the company, but it also has the potential to dilute the company’s equity and valuation. Valuation is critical at stages in startup financing because it influences the type of investors likely to get involved. It also explains why the company is looking for new funding.