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6 Levels of Startup Funding One Must Know About

  • Bhumika Dutta
  • Dec 07, 2021
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Introduction

 

If you are reading this blog, you are an avid internet user, like most of the other people in this world today. Due to the widespread availability of the internet, which allows people to investigate and learn about any topic they desire, startups are becoming increasingly popular as a career option. 

 

Any excellent concept may be acquired, put into action, and transformed into something enormous and famous. However, in the early phases of a business development cycle, more than simply a fantastic idea is required. It requires a significant amount of time, discipline, attention, and, most significantly, funds.

 

Every company aspires to progressively build a customer base, generate profit from the original capital, climb the ranks of its rivals, and eventually gain highly coveted recognition. 

 

Although this is not impossible, most new businesses struggle to get funds in the early stages. According to cloudways, a 2016 British Business Bank survey found that more than 60% of businesses require external capital rounds to get their feet on the ground.

 

This article lists 6 levels of startup funding that entrepreneurs must know about to build a strong foundation for their business. But, before delving into different types of funds, let us get some insight into how these fundings work.

 

(Read related to startups: List of Latest Startups in US and UK)

 

 

How do these fundings work?

 

Let's talks about how these fundings work as per the requirements of the participant. 

 

  • The first group of participants is entrepreneurs seeking finance for their businesses. As a firm matures, it progresses through the fundraising stages; it's normal for a company to start with a seed round and then go through A, B, and C capital rounds.

 

  • Potential investors are other participants in this tyrant. While investors want firms to flourish because they promote entrepreneurship and believe in the company's goals and causes, they also want a return on their investment. 

 

As a result, practically every investment made at one or more stages of development funding is structured so that the investor or investing business keeps a portion of the company's ownership. 

 

If the business succeeds and makes a profit, the investor will be compensated in proportion to his or her investment.

 

  • Analysts do a valuation of the firm in issue before any round of fundraising begins. Many aspects go into determining a company's value, including management, track record, market size, and associated risk. 

 

One of the most important differences between investment rounds is the business's value, as well as its maturity level and development possibilities. 

 

As a result, these characteristics influence the sorts of investors who are likely to participate, as well as the reasons why the firm may be seeking fresh funding.

 

(Read also: Techniques Used in Business Analytics Framework)

 

 

Different Stages of Funding

 

Let us start learning about the different stages of funding:

 

  1. Pre-Seed Funding:

 

Pre-seed funding is the first round of investment for a new firm that occurs so early in the process that, most often, it is not usually counted among the fundraising rounds. This stage is commonly known as bootstrapping. 

 

It usually refers to the time when a company's founders are just getting their business off the ground. The founders, as well as close friends, supporters, and family, are the most prevalent "pre-seed" financiers.

 

During the pre-series stage, it's unlikely that investors would make an investment in return for ownership in the firm. This fundraising stage might happen fast or take a long time, depending on the nature of the firm and the early expenditures associated with establishing the business idea. It's also possible that at this point, investors aren't investing in exchange for stock in the firm. 

 

Once a business has attracted its first investor, it may find it simpler to obtain more capital. Angel investors invest at this level as well, although they have far less clout in this investment round than they had in the seed round.

 

Watch a video on Pre-seed capital:



  1. Seed Funding:

 

The first recognized step of equity fundraising is seed capital. It is usually the first formal money raised by a commercial endeavor or firm. This aids the company in determining and implementing the best course of action for their venture. 

 

Because investors are taking a big risk by investing in a startup, entrepreneurs must provide them ownership in exchange for seed money. The risks are considerably higher because entrepreneurs can't guarantee a successful business plan at this stage.

 

This money is used to figure out what the client wants, likes, and dislikes, and then create a product or service that meets those needs. To achieve these responsibilities, seed capital is utilized to hire a founding team. 

 

In a seed fundraising situation, there are many prospective investors: entrepreneurs, friends, family, incubators, venture capital firms, and more. 

 

 

  1. Series A:

 

Venture capital financing can help a company expand into new business channels or consumer groups, or improve marketing efforts to attract more customers. The initial round of venture capital funding is known as the Series A stage. 

 

Once a firm has established a track record (a large user base, regular sales numbers, or some other critical performance indicator), it may choose to use this capital to improve its user base and product offerings. 

 

It's critical to have a plan in place for the Series A investment round that will yield long-term earnings. Many times, entrepreneurs come up with fantastic concepts that may attract a large number of eager consumers, but they are unsure how to monetize them in the long term. 

 

Angel investors and established venture capital companies provide the majority of Series A investment. They are not searching for "amazing ideas," but rather for businesses with a good business model that can transform their excellent concept into a successful, profitable firm, letting investors profit from their investment.



  1. Series B:

 

Following seed and series A investment, the firm would reach a point where it could generate a consistent source of revenue from a large user base.

 

Investors help firms grow by supporting market reach operations, growing market share, and forming operational teams such as marketing, business development, and customer success. 

 

The series B fundraising stage helps businesses to expand so that they can address the diverse needs of their clients while also competing in competitive marketplaces.

 

A company's investment in business development, sales, advertising, technology, support, and staff is a few cents. 

 

The average projected cash raised in a Series B round, according to investopedia, is $33 million. 

 

Series B firms are well-established, and their valuations reflect this; most Series B companies are valued between $30 million and $60 million, with an average of $58 million. 

 

In terms of methods and important actors, Series B looks to be comparable to Series A. Many of the same people from the previous round generally lead Series B, including a major anchor investor who helps to attract other investors. 

 

The distinction between Series A and Series B is the addition of a fresh generation of later-stage venture capital companies.

 

 

  1. Series C:

 

Startups that reach the series C investment round should be well on their way to success. These firms are looking for more investment to help them develop new products, expand into other areas, or even purchase other underperforming startups in the same field. 

 

Investors are happy to finance successful firms at the series C investment stage. The reason for this is that the company has already proven itself to have a successful business model; these new investors come to the table expecting to invest significant sums of money into companies that are already thriving as a means of helping to secure their own position as business leaders. 

 

They expect to make a profit that exceeds their initial investment. The Series C fundraising stage focuses on accelerating the startup's growth.

 

Series C finance is aimed at scaling the business and ensuring that it grows as swiftly and profitably as feasible. Acquiring another firm might be one approach to expand a business. 

 

Hedge funds, investment banks, private equity firms, and significant secondary market groupings join the above-mentioned types of investors in Series C. 

 

With Series C, a company's external equity fundraising would come to an end. Some businesses, however, can advance to the Series D and even Series E rounds of capital. 

 

Companies that get hundreds of millions of dollars in capital through Series C rounds, on the other hand, are often poised to expand globally. Many of these businesses use Series C capital to raise their valuation in preparation for an IPO.

 

 

  1. Initial Public Offering (IPO):

 

The process of issuing corporation shares to the general public for the first time is known as an initial public offering (IPO). 

 

An IPO occurs when a startup decides to obtain capital from the general public, including institutional and individual investors, by selling its shares. 

 

All of the investors who have traded their money for stock up to this point should be able to repay their investment plus profit. 

 

When a startup decides to go public, the IPO process entails a series of activities. They are as follows:

 

  • Forming an external public offering team composed of underwriters, attorneys, certified public accountants, and Securities and Exchange Commission (SEC) professionals.

  • Compilation of information about the startup, including its financial performance and planned future activities.

  • The startup's financial accounts are audited, and an opinion on its public offering is formed.

  • The startup submits a prospectus to the Securities and Exchange Commission (SEC) and sets a date for going public.

 

Stock options for a growing firm may be used to recruit top employees after the IPO, and enhanced access to finance can give resources to keep the business moving ahead.

 

(Related read: Top 15 US IPOs of All Time)

 

In the last, understanding the differences between these capital-raising rounds can aid you in deciphering startup news and assessing entrepreneurial potential. This article talks about the six types of funding that each startup owner should be aware of.

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