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Seasoned entrepreneurs know these terms very well, but novice entrepreneurs might feel a little overwhelmed.
So, lets jump into this startup funding guide.
Why Do Startups Need Funding?
A startup can be founded and managed by one or more entrepreneurs.
The main aim of a startup is to address a specific demand for a product or a service.
Hence, they have a niched target customer base.
Startups are mostly high-cost, low-revenue businesses and thus require outside capital to run their business.
To fund these monetary requirements, companies go through various startup funding stages.
Each stage is defined according to the companys needs, profitability, valuation, future plans, and more.
How Does the Startup Funding Process Works?
Before any capital is raised, theres a process of assessing the valuation of a company.
Valuation is based on management, growth expectation, projections, capital structure, market size, and risk.
Some seasoned investors also have their own methods of evaluating a business.
Note:Before entering the funding stage, you must register your company as a Private LLC.
This is a mandatory legal requirement.
A sole proprietor or an unregistered private startup cannot raise funds beyond the pre-seed stage.
This analysis will verify that your business idea is executable.
This money could come from your personal savings or borrow money from your friends and family.
The pre-seed funding round is also known as bootstrapping.
According toFailory, 9 out of 10 startups fail at the seed funding stage.
Hence, these early-stage investors are called angels.
you’re able to also raise some funds from friends and family or via a crowdfunding campaign.
Potential investment depends upon the parties and their investment capacity.
The company also intends to invest in the latest technologies.
At this startup funding stage, the Series A round begins.
If you have seen the popular show Shark Tank, youd be familiar with the Series A funding round.
Companies need to raise funds from established venture capital firms to fulfill this increased capital requirement.
There is no pre-determined amount that you’re able to raise in each of these Series rounds.
It depends from company to company.
Lets discuss the potential funds and their uses in each Series round.
All of which is necessary to turn the startup into a successful, money-minting business.
This is why companies that are valued at up to $50 million go for Series A funding.
Still, Series B funds are used to expand the market reach and meet increased demands.
Only well-established companies go into Series B funding.
Series B investors are mostly the same as Series A the big institutional investors.
Often, there is an anchor investor that reels in other investors.
An investors objective is to get a 2X or 3X return on their investments.
Series C funds are mainly invested in scaling the company by expanding the market reach or acquiring another company.
If a company has more ambitious revenue goals, it can complete as many fundraising series as needed.
This can be a 100% takeover deal or even a merger.
You, and your investors, can decide to take all the profits and exit the company.
Remember howFacebook took over WhatsApp?
At this stage, the private startup becomes a public company and raises funds directly from the public.
The stock exchange can be within the country of operation or in another country.
The company can even be listed on multiple stock exchanges.
The company chooses one or several underwriters who lead and manage the IPO process.
Once everything is done, the company will be listed on a stock exchange.
Once publicly available, the general public can buy and sell the companys shares.
This is how the company will now raise funds.
IPO is the final part of the startup funding stages.
Startups should choose the funding path that best aligns with their goals and objectives.
Seed funding is a good option for startups that are just getting started.
Angel funding is a good option for startups with a working product looking to grow.
Venture capital funding is a good option for startups that are looking to scale.
Private equity funding is a good option for startups that are looking to acquire or merge with other companies.
Next, check out working capital providers to fund your business growth.
