Being a startup owner is a challenge in itself, and why not when you have so many factors to look at while organizing a vast level of production and functionality. But one of the main factors that mustn’t be overlooked is the process involved in funding.
Whatsoever, it all starts with funding! Irrespective of the size and type of the business, a startup needs money to bring its ideas into action.
It is a lucrative endeavor for many entrepreneurs who pulls up a lavish fund, but the chances of failure are too high when a company is unable to raise desired money to maintain the capital infrastructure.
No matter what, the idea of startup funding is necessary if you are a budding entrepreneur; before setting the foundation of your dream into reality, you must know the startup funding stages and various concepts that revolve around the same.
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What is a startup, and how startup funding works?
A business that has just begun getting off the ground is a startup in simple language. One or more business owners usually form it to satisfy a particular need for a good or service.
Startups have significant operating expenses and limited income, so they must look to outside investors for funding until they can turn a profit.
A person’s ability to influence a company’s operations may also hinge on how much money they have put into it.
Startup funds aim to provide individuals or organizations to raise capital for the new business they desire to build, enabling the enterprise to expand.
Also, investors funding a business or startup don’t do it just in favor of helping a brand or so but expect to make more money from the company eventually.
Stages in startup funding
Stage 1: Pre-Seed Funding
The prime step of the start-up funding process begins with pre-seed funding, a phase where start-up development operations are getting started or presumably not even started yet.
This is a very early stage of start-up investment where it’s expected that funders won’t contribute positively to start-up stock returns.
The stage also noted as the bootstrapping stage, is where the proposals and the viability of the company’s vision are only being examined at this point in the marketplace testing stage.
The expenses would cover the price of creating the design, planning the product release, and developing concepts for various marketing and sales initiatives.
While the owner typically looks to earn extra money at this phase for better investment and to grow most resourcefully.
Stage 2: Seed Funding
Pre-seed funding stage follows then the seed funding stage, which is the initial stage. The seed investment can be considered an analogy to planting a tree, where the initial investment is the “seed” that enables each firm to grow.
The start-up, in this sense, will flourish into a tree only if it gets good water, i.e., a profitable business model and an entrepreneur’s commitment.
Most companies fail at the bootstrapping stage because they fail to surge the money needed to build the business model. Henceforth, seed funding becomes essential to start the business.
Start-ups must give investors ownership in exchange for seed capital because they are taking a significant risk by making investments.
A firm might use seed money to cover the expense of launching a product, get initial momentum through promotion, start key hiring processes, and conduct additional market research to produce goods that suit the market.
At this stage, the product is launched after being designed with the intention of going on sale. The creators aim to raise capital during the seed funding stage to conduct market research and learn more about the interests and requirements of their target clients.
Stage 3: Venture Capital Stage
This phase got multiple stages to raise funds and increase the value of the start-up business.
- Series A Funding
This point signifies that the start-up must have a finished product and a steady stream of paying customers. This stage emphasizes the importance of having an effective strategy for long-term funding, and Series A funding plays a part in improving value propositions.
Start-ups frequently have brilliant concepts that can attract a sizable number of devoted consumers, but they lack the long-term monetization skills to make them profitable.
Angel investors and conventional venture capital companies account for most Series A funding. It is typically considered to follow the 30-10-2 rule to identify investors who can invest in a start-up.
These investors look for a great business model to transform excellent ideas into profitable ventures.
Although investors like to fund at this stage, an angel investor usually has less sway than a VC firm.
(30-10-2 rule proposed to search for 30 investors, among which 10 might show interest in your company to invest and 2 of which will actually pass on funds to you.)
- Series B Funding
Investors aid the company in expanding its horizon by funding them to reach a broader market. Start-ups might develop during the series B investment stage to expand their customer base and compete in markets with high levels of competition.
The step overall is the business expansion phase, where the management and workforce grow in addition to its product and service offerings.
This phase justifies that now your company has grabbed a profitable investor, and you have built a sizeable user base and a consistent income stream.
The Series B funding resembles the earlier stage; nevertheless, it is led by the same individuals, including a vital anchor investor who aids in luring further investors.
The distinction in both steps is the emergence of a new generation of venture capitalists that focus on funding well-established firms for them to continue to outperform projections.
New enterprises at this phase are allowed to grow to satisfy the various needs of their clients and, in addition, compete in closely related markets.
- Series C Funding
With Series C funding, you can rapidly scale up your business by gaining more investments and buying more start-ups.
The company moving further the stages holds on the investors who aid in developing new goods, expanding their markets, and preventing competitors from exceeding the objectives of similar new company ventures.
They may even consider purchasing other new, struggling firms. Moreover, investors gain profit that exceeds their initial investments, and financial firms, hedge fund managers, and private equity businesses appear at this phase because the risk is likely negligible.
By now, start-ups have already demonstrated the success of their business, and to establish themselves as top investors, new investors enter the market by making substantial investments in successful firms.
The company that reached the Series C funding must have acquired a sizable client base, reliable income streams, a track record of rapid growth, and a desire to expand internationally to prove its success.
Typically, this stage is considered to be the last stage of the funding process
- Series D Funding
Those businesses that decide to proceed through this stage typically do so if either the company has fallen short of predetermined goals or has discovered a new potential to capitalize on it before pondering for IPO.
Even if the start-up has an idealized merger with rivals on fair terms, Series D funding is an option that leads entrepreneurs with the most practical options to address problems head-on by merging with another start-up.
Overall, this stage enables the company to make more money for some specific circumstances if Series C hasn’t helped them to reach their milestone.
- IPO
Also known as Initial Public Offering, this is the final phase of startup funding where the company decides to sell corporate shares to the general public, directly aiding the business’s expansion and diversification.
The IPO is frequently used by developing startup owners that require capital to raise money.
However, it is dangerous if the public is unaware of how the shares trade in the market, but on the other hand, a business may perform exceptionally well, leading profit to for investors.
The well-established companies utilize this process to enable startup owners to depart all or most of their shareholding by offering the stock to the public.
There is a specific sequence of activities that takes place in the process of IPO like
- Assembling the team of professionals for outward public offerings like attorneys, CPA specialists, and others.
- Actual details on the startups, a collection of its quarterly earnings, and predictions for its upcoming operations.
- The evaluation of the public offering of a company is made after its analysis of the income statement has been conducted.
- A date is chosen to go public and submit the prospectus to the SEC.
Other factors of start-up funding
Besides the mentioned stages, there are some other aspects to know before going for the startup funding procedure like
- Crowdfunding – a way of collecting money via friends, family, or investors is crowdfunding, where a considerable number of people work together, mainly online, to expand their visibility to gain funds from them by exhibiting their business plans and market research. It is a strategy that significantly streamlines the conventional paradigm by providing the entrepreneur with a solitary platform to create, present, and exchange pitch resources.
- Venture capitalist- is a process of funding invested in new companies and small enterprises that have the potential for rapid expansion but are typically high risk. The startups need to be ready to accept and employ the vast investments to expand. A few associates who have secured a sizeable sum of funding from several limited partners to engage on their account typically form a venture capital firm. LPs are high institutions using VC services to generate higher returns on their investment.
VCs must invest in ventures with a massive outcome to generate a significant return in a brief period. These results help compensate for the losses incurred from the considerable amount of error that hazardous investment draws and offer excellent fund returns.
- Loans – usually, loans are provided in different ways:
- The loans are relatively small and can be paid within 18 months or so as short-term loans. They are used in-store gaps when a business is encountering cash flow issues.
- Business credit cards are also a fantastic choice for startup firms. Select the one having 0% introductory APR since you’ll effectively get free debt if you can clear the balance each month. But always beware of high-interest rates and be realistic in paying the debts of credit cards or going on for SBA loans.
- Borrowing money from friends and family in the form of loans differs from traditional loans. But it should be considered under a formal agreement like expanding your already established personal relationship.
- Angel investors – Because they are typically one of the most easily accessible sources of early-stage capital for a company, Angel investors are people with high net worth with whom every startup wants to be associated. Angel investors invest in a business with a relatively small amount of money for more significant equity. These investors don’t have to maintain a decision-making partnership; instead, they bring in the best expertise for startups to make more money with their extended network.
Nonetheless, they are a huge benefit for startups because they frequently have more organized procedures for evaluating new applications and can connect the entrepreneur with numerous new angels at once.
Bottom line
An unusual step-by-step guide must be heeded when you are sophisticated in startup funding procedures.
Following this noteworthy guide will help you make a more careful decision and ultimately lead you to better results.