What are the Stages of Startup Funding?
It is commonly believed that when a startup raises capital, it accomplishes its fundraising goal. However, in reality, a startup’s journey is not that easy and different rounds of financing are raised by the startup.
Founders need to understand the different stages of funding in order to plan better and know how to approach investors accordingly. “Failing to plan is planning to fail”, this is why an effective fundraising strategy is crucial for startups.
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Let’s get started with the first steps to a good fundraising strategy:
- Value Your Startup
Before building the strategy, a valuation exercise has to be done.
This is essential since the founder has to understand the real value of what he is selling.
InnMind knows that valuation is not an easy process. For this reason, it offers an accurate startup valuation calculator. Calculate the fair valuation of your startup right now by using the startup valuation calculator. - Set Goals and a Time Limit
To start a good fundraising strategy, the first step is to set a goal and a time limit. It is essential to define the milestones that will be achieved within a specific time by raising the needed amount of money. - Research the Right Investors
The second step is to research the right investors that not only invest in the round the startup is raising but also master the ins and outs of the industry the startup operates in. If the investors understand the industry well, they can add value to the startup by providing the right strategic recommendations.
The track record of the investor is also very important; a startup should research if the investor has made previous successful exits or if the investment firm has a high internal rate of return over a long period of time. It is important to note that different IRR goals are targeted by each investment firm depending on the stages of its investments.
The Funding Stages
Pre-Seed Stage
As its name indicates, the pre-seed round is the first round that occurs before the seed round. Previously, the pre-seed funding was not listed among the official funding rounds. It was recently considered as a funding round due to the growing interest of investment companies in the early stages of funding.
This round of investment is secured by friends, family, founders, business angels, startup studios, accelerators, incubators and through crowdfunding.
The amount of investment is usually up to $500K.
In this stage, startups are still doing their research or development and few will have a working prototype. Usually, founders will look for guidance in shaping the startup’s idea and their business model.
Seed Stage
The seed funding is the first traditional round of investment.
This round is secured by business angels, startup studios, accelerators, incubators and venture companies.
The amount of investment is usually up to $2 million.
In the seed stage, usually, the funds are used for market research. The aim is to identify the target customers’ preferences and tastes. For other startups, it is the stage in which they will be launching their product in the market or they will be developing it for this purpose.
Series A - Round
The series A round is considered as the first round of financing taking place within the risk capital stage.
This round of investment is secured by venture capital funds.
The amount of investment in this round starts from $500K.
In this phase, the product and service should be ready. The startup has a customer base generating a reliable revenue stream. It is very important to secure a long-term agreement in this round of financing.
Series B - Round
It is in the expansion phase of the startup that the series B round occurs.
This round of investment is secured by venture capital funds and private equity funds.
The amount of investment in this round starts from $2 million.
At this stage, the startup needs financing to scale and to go to the next level.
Facebook, now Meta, secured $27.5 million in its series B round of funding in April 2006, the funding increased the valuation of the company from $98 million to $500 million. In October 2007, the company raised a $240 million series C from Microsoft. It was a strategic investment by Microsoft who was trying to figure out social media. The valuation reached $15 billion and Microsoft only got a 1.6% stake in the company. Facebook’s IPO that took place in May 2012 is the largest technology IPO in American history to that date. The company priced its IPO at $38 a share, which would value Facebook at $104 billion.
Series C – Round
Generally, a series C is the final round of funding for startups. The percentage of companies that raise a series D round is below 5% and consequently the percentage is lower for the ones that go for the next stages (E, F or G).
This round of investment is secured by venture capital funds, strategic investors, hedge funds and private equity funds.
The amount of investment is between $10 million and $30 million.
In the series C round, the company usually innovates and comes up with new products, it targets new markets as well. In this stage, the company can also make an acquisition of another startup for strategic purposes.
Series D – Round
A series D funding can usually mean that the company is having a lower valuation because when this round occurs, it means that the company could not meet its goals with its series C.
This is not always the case, every company has a different situation. Zoom, for example, achieved a unicorn status in 2017 after raising $100 million in a Series D round. This round of investment valued the company at $1 billion. With the rise of the Covid-19 pandemic and the embracing of remote work, Zoom kept growing and its valuation skyrocketed to $161.5 billion in October 2020 (a massive increase from its $9.2 billion IPO valuation given in April 2019). Currently, in January 2022, Zoom’s market capitalization is $50.22 billion.
Series E – Round
When the series E round occurs, it usually means that the series D funding was not enough for the company to meet its capital needs. It is also a very bad indicator. This round of investment takes place when the company cannot generate its own capital but is still fighting to survive.
Series F / G – Round
It is really rare to see a business going through the series F / G funding but it is possible. It is important to note however that some remarkable companies have gone through these rounds of financing.
IPO
The initial public offering is the last phase of funding a startup can go through. It occurs when the company wants to make a transition from private to public by selling its shares to institutional or individual public investors.
Despite its disadvantages, an IPO offers many benefits for a company such as getting more recognition and a higher chance to get a loan from banks that are more willing to lend to listed companies. The company will not only increase its possibilites to raise funds from more potential investors but also the public might value the company more generously than private investors. Another advantage is that being listed offers the opportunity for founders to liquidate some of their holdings.
Every round of financing offers a new opportunity for the company but it can also dilute its equity and reduce its valuation.
Get in touch with the right investors and raise funds with InnMind
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