As a startup founder, it is a must to know the startup funding stages. Knowing where your startup stands can help you, as a startup founder, to determine the value of your startup. If you are yet to see the startup stages, then you came by the right article.
A startup is just like a seed; let’s say an apple seed. You want to grow and harvest apples, so you plant the seeds. You water it and nurture it until it sprouts leaves. Still, you took care of the sapling; devoted your time, energy, passion, and money. Years later, you had your first batch of apples.
That apple seed is your idea. If you merely left it on a shelf forgotten, it will never grow into a tree. You need to plant it. You need to take your idea into action. But your startup can’t grow bountiful fruit if you leave it as is. As a startup founder, you need to nurture and water your seed. Your startup needs funding to grow. However, startup funding has a lot of stages. This article will help you understand the startup funding stages that founders should know.
Startup Funding Stages
This level is known as bootstrapping. It is when entrepreneurs build their businesses from scratch, without investors; it is just you, your own idea, your personal savings, and your luck. There is no outside cash, no investor support.
This funding stage is the most common beginning of startups. The entrepreneur builds the business from personal savings, so decisions regarding the company and its products are solely in the founder’s complete control. In this stage, you’ll find that the founder spends more time building the product rather than pitching the idea to venture capitalists and other investors.
However, a pre-seed capital stage can be very restricting. There won’t be adequate funds for your business to scale up. That is why an outside investor can be beneficial.
Some entrepreneurs would argue that pre-seed funding is not considered a startup stage since it does not involve outside investors. Contrary to most belief, we added this to the list since it is still a funding stage of startups with you funding your own business. And you won’t find yourself alone at this stage. Though most of the funding comes from your personal savings, there are still other potential investors in this stage.
The most common pre-seed capital investors are friends and family. Maybe you know someone—a family member, close friend, or co-worker—who can help fund your business.
This is the level where you develop your product, making it a very crucial stage. In bootstrapping, almost 29% of startups fail by running out of capital. For those who succeeded, it was not just by chance. What they had was an excellent business idea.
Here are some bootstrap startups who made it big:
- Tough Mudder
- Electronic Data Systems
The startup’s value is between $10,000–$100,000.
This stage is where the first official funding starts. You will be looking for outside investors who will provide funding costs for market testing, product development, and speed-up operations. Funding from this stage may come from angel investors, crowdfunding, accelerators, and incubators.
Angel investors are individuals with wealthy high net worth—those who possess a minimum net worth of $1 million and at least $200,000 annual income. They’re also commonly known as angel funders or seed investors since they help out early-stage entrepreneurs and startups. They provide the funding for your business in exchange for ownership equity. Angel investing is a high-risk move. These people willingly spend their money on startups without an established business model or any assurance that they will succeed.
To secure funding from angel investors, you must make sure to provide suitable materials that prove your business is scalable. Here are the things you need to prepare:
- Create a comprehensive business proposal. You should have a business proposal complete with a target market, feasibility study, and business action plan. Angel investors will want to put their money into a business idea that guarantees a profit.
- Attend startup events. Angel investors won’t search your business, you must reach out to them. Attending events for a startup gives you the optimum opportunity of presenting your business proposal and finding an angel investor to fund your business.
- Contact angel funding groups. Again, angel investors won’t know about you or your business if you don’t introduce yourself first. Search up angel investor groups where you can successfully pitch your proposal.
- Ohio TechAngel Funds
- Tech Coast Angels
- Investor’s Circle
- Golden Seeds LLC
The startup should have a value between $3 million to $6 million to be eligible for seed funding.
After you’ve successfully developed, marketed, and profited from your seed round, then you are ready for series A funding. The seed round is crucial in gaining investors for series A; it serves as your business portfolio. A successful seed round means that your business has a marketable product and scalable business model.
Benefactors from this stage are angel investors and venture capitalists. Your earlier investors can participate in this stage of funding, as well as other outside investors. However, this stage requires a group of investors that can help take your business to the next level. This requires more funding since you’ll be innovating your MVC and speed-up production.
The success of your angel investment is enough proof for potential series A investors to bet on your business. They will be evaluating how you optimize the seed capital.
Series A investors
- IDG Capital
- New Enterprise Associates
A startup should have an estimated value of $10 million to $30 million to be eligible for series A funding. They can raise approximately $15 million during the funding stage.
When your company generates a consistent revenue but must scale up to meet the growing demand, then you are ready for a Series B funding.
If series A focuses on the development stage, series B concentrates on building and expanding market reach. Series B is used to meet the demand due to the success of the previous funding stages.
Once there’s a growing demand for your product or service, you will need employees, business development, advertising, increasing sales, and technical support. This requires a lot of money.
Series B is not so different in process and terms with Series A. Your investors also consist of your previous partners. However, you will need a star investor who has more connections and an excellent track record to attract more investors.
Series B investors:
- Sequoia Capital
- Tencent Holdings
- Insight Venture Partners
Startups are usually valued at $30 million to $60 million. You can raise up to $30 million during this startup stage funding round.
Series C and Beyond
If you are trying to venture to series C funding, then you have quite a successful company here. A startup has already achieved business success by completing the series B round. However, there’ll be some who want to go further to series C funding.
Series C aims to develop a new product, expand its reach to a new market, or acquire a new company. Investors, in this case, are attracted to investing in the company’s success in the hopes of getting twice the amount they entrusted.
Investing in a successful business is less risky, which in turn attracts more investors. For this funding round, you can encounter investors like hedge funds, investment banks, and equity firms.
Some businesses pursue funding series D and beyond, but series C is already enough. Occasionally, companies go for series D round but this only happens when the goals in series C are not achieved.
Series C investors
- Kleiner Perkins Caufield & Byers
Series C valuation:
Startups ready for series C funding are those valued from $100 million to $120 million.
IPO or initial public offering is a process that both startups and established business practices. Established businesses use this process to acquire companies by allowing startups or even mid-level companies to sell their shares to the general public.
An IPO is a big leap for a startup. This funding raises money by allowing public access to the company. With IPO, a private company goes public, converting the shareholders’ shares to the public trading price.
And those are the startup funding stages. It’s better to be familiar with these stages as a startup to know where your business stands. Knowing your startup stage allows you to evaluate how your business is fairing; it determines if your business is scaling or remaining stagnant. Using this scale also allows you to choose what business plan you should use to grow your business more.
Once you’ve made an action plan, you need to make it happen. In scaling your startup, Full Scale is here to help. Full Scale’s talent pool ranges from software developers, web developers, content writers, copywriters, creative illustrators, and dedicated project managers.
The company’s CEOs are successful entrepreneurs; one sold a million-dollar company, and the other is a best-selling business author. If you are ready to bring your company to the next startup stage, schedule a consultation today.