Startup funding has been changed over a past few years. Previously, the options available for the startups to raise funding are very minimal. Now, with so many funding options, it is quite a bit of overwhelming, exercise for the entrepreneurs to raise funding.
Here is a quick overview of the most common funding stages for startups and small businesses.
1. Seed Capital
Seed Capital is basically your first stage of funding. It is typically your first investment at the time of implementing your idea. It can be in any form like self-funding, friends and family, receiving in the form of loans, crowd-funding and bootstrapping. The advantage of this stage of funding is, it helps to focus on execution and build traction without outside interference.
2. Through Angel Investor
Since the first stage of funding is always limited, it is wise for an entrepreneur to reach out to those individuals who are willing to invest. These individuals can be founders of other startups. To obtain higher margins, to reduce the risk when your startup is in growing stage angel investors can help you.
3. Through Venture Capital
If you are already selling your product or service, then an entrepreneur can approach venture capital firms for funding. There can be multiple rounds of VC funding i.e., Series A funding, Series B, and Series C funding. The VC’s are interested in mostly the growth prospect of startups, so the chance of grabbing funds is much higher than compared to angel investors. Let’s look at different series of funding
I. Series A
The series A funding is larger than other funding, mostly it is from 3-5 million dollars and will be offered in an exchange with a small part of the company. For startups, it is the best way for them to figure out their best business model for company.
II. Series B
It is usually referring to the second stage of financing. It is suitable for those who have already achieved few milestones of their business. Series B funding raises approximately 5-10 million dollars. Greater capital investment is offered in this round along with a greater possibility of going back to this same startup well for future rounds. VC’s have more vision around where the company will evolve, what is required, and as a result how large of an equity position they expect to obtain.
III. Series C
Here market share is maximized. One way to scale is acquiring competitors, suppliers and/or distributors; another method is expanding into new markets. The amount of funding is from tens to hundreds million dollars. It is applicable for those who seek for the additional funding to expand in new markets and to achieve future milestones.
Expansion Stage of a Startup
In this phase valuations and committed capital varies wildly and can be heavily negotiated. You will own a microscopic amount of the company you started at this point. In most cases, you will own 10% or less. However, you more than likely will have a valuation north of $30M and most cases much higher. If you believe you have a real chance of becoming a unicorn (a company valued over $1B) with an excellent chance of going public, then I usually recommend that you sell your business at this point or very soon after that
Expansion Stage of a Startup
In this phase valuations and committed capital varies wildly and can be heavily negotiated. You will own a microscopic amount of the company you started at this point. In most cases, you will own 10% or less. However, you more than likely will have a valuation north of $30M and most cases much higher. If you believe you have a real chance of becoming a unicorn (a company valued over $1B) with an excellent chance of going public, then I usually recommend that you sell your business at this point or very soon after that.
The companies at their late/last stage try to seek for mezzanine or bridge financing. Usually, this mezzanine financing takes place up to 6-12 months before into public.
5. Initial Public Offering
Companies can raise money through selling stock to the public in what’s called an Initial Public Offering (IPO).
Now that you know the stages of funding, outline the milestones for your startup and future of your company. Use the milestones and financial projections to come to a figure of how many funds you need. The process of each stage works essentially the same, the difference is risk tolerance or risk mitigation that attracts different capital sources seeking different returns on investment which translates to how much equity will be required for the infusion of cash.
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