Startup Funding Stages: Different stages of funding for startups explained

Thinking of turning an idea into reality, a startup needs funds at every stage.

Even building the prototype requires some expenses.

Some individuals have initial funds to lay the foundation of their idea at least.

Others don’t have the funds to start their business.

Funding is critical for maintaining a cash flow in the market. Many startups shut down every year due to a shortage of funds.

If the startup owner fails to procure funds at a crucial instance, the operations may cease after suffering recurring losses.

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Hence, one must try and secure funds according to the startup funding stages so that the funding pool also keeps on enhancing as the startup progresses.

Table of contents

  1. Startup Funding Stages
  2. Summing up

Startup Funding Stages

Ideation is one of the initial stages of a startup.

During Ideation, the startup owner merely has an idea. Funds are required to give a working shape to the picture.

Some startup owners might have a prototype, demo video, presentation, and other relevant means to convey that the idea is feasible.

This stage is also known as the pre-seed stage.

The fund requirement during this stage is usually small.

Since, at this stage, the startup doesn’t own much or has earned much, the core to prove its potential is less, so the investment methods are informal.

If your startup is in the Pre-Seed or Ideation stage, there are usually three popular ways of raising funds:

1. Bootstrapping or Self-financing

Bootstrapping a startup means starting a business without outside investment or venture capital.

Bootstrapping implies relying on monthly savings and generated revenue.

Bootstrapping is the preferred way of starting a new venture as there is no compulsion to clear the debts, pay considerable interest, share the control, or dilute the equity.

2. Raising funds from acquaintances

In the beginning, it becomes difficult to win the trust of unknown people, as the startup is not making any money at this stage.

Entrepreneurs usually expect support from those who know and believe in them.

Typically, close friends and family members extend their support to the entrepreneur by providing a small number of funds.

Even if you are taking funds from a very close resource, you must have it mentioned in pen and paper, as, in business, there is nothing such as free money.

Use a lawyer to draft shareholder agreement.

In return, they might hold some equity or expect the money back with interest when the company becomes profitable.

3. Raising funds at pitching events

Several institutes and organisations provide vast opportunities for budding entrepreneurs to initiate business activities.

The judges sanction the funds through competitions and challenges depending upon the business’s scalability, scope, purpose, and amount.

Some institutes may provide mentors along with prize money, grants, or similar support to the winners.

Even though the amount sanctioned may be small, it is enough to kick-start the idea.

An insightful business plan helps you secure more funds and increases your chances of winning the contest.

You must try to participate in such a contest, as even if you don’t bag the prize money, you can get helpful feedback from the industry experts and build up a few contacts.

  • Seeding Fund

Post the pre-seeding phase, it is the right time to raise funds via the seeding round. Seeding can be known as the first stage of startup grants.

Over 30% of startups go out of capital once they have launched themselves through bootstrap funding, which provides the primary funding for starting the business and initiating operations.

One of the aims is to raise funds via the seeding phase to survey customer preferences and product feedback.

The tangible product or service is released in the Seeding stage and is made available to the users.

The owners build traction to maintain a constant cash flow so that the operations and distribution go uninterrupted.

  • Angel Investor Funding

Once you launch your product in the market, you will need more funds for scalability, product development, market, increasing the number of employees, or just adding more departments and production units.

You can approach any angel investors to get the funds.

If you intend to raise funds through this channel, the enterprise model canvas must be manifested.

As defined by the SEC, accredited Angles invested are individuals with a minimum net worth of one million dollars and an annual income of two hundred thousand individually or three hundred thousand along with their spouse.

Angels differ from other investment channels, such as Venture Capital firms, as they invest their money.

They can support the startup individually or along with some peers.

As the money offered will be higher than that in the pre-seeding and seeding rounds, the competition and the pitch expectations will be much higher.

  • Venture Capital

The venture capital funding stage comes once the end product or service reaches the consumer.

Irrespective of the product’s revenue, every startup intends to raise funds in this stage as it opens an opportunity to grow further funding rounds.

  • Series A

Series A investment is the first round of venture capital funding; therefore, it doesn’t include external financing.

In this stage, the startup owners already have a clear plan for the product and its scope.

The funds are usually raised for marketing, branding, customer acquisition, penetrating new markets, and expanding the business.

  • Series B

Once a startup enters the Series B investment of venture capital funding, it implies the product has been marketed well and has achieved the target decided by the team earlier in terms of the number of units or number of customers.

Usually, the funds are used to pay employees’ salaries, recruit more people, get more machinery, and impact the customer.

  • Series C

There is no restriction on conducting investment rounds; one startup can raise as many iterations of investments as possible.

Moreover, once the Series C investment stage is reached, the owners and investors are cautious about conducting further rounds.

This cautiousness is because the more the investment rounds, the more the equity dilution, and as the startup starts doing well, no one is ready to let their equity go off quickly.

  • Initial Public Offering (IPO)

When a startup offers shares to the general public for the first time, it is an IPO.

Emerging startups think of it as an easy funding strategy and quite popularly use it for generating funds.

On the other hand, established startups use it to release all the shares to the public so that the startup owners quit their ownership.

Overall, there are two main agendas for releasing an IPO: one is to generate funds, and the other is to transfer ownership.

IPO involves a set of necessary events while giving out the shares to the general public. They are:

  • The startup has to appoint an external public offering team with advocates, underwriters, certified public accountants, SEC experts, etc.
  • The owner should create a portfolio with all the necessary financial details of the startup. It should also include the previous statistics, along with the future operations.
  • The owner is Auditing the startup’s financial statements to create an opinion about its public offering.
  • The startup needs to file its prospectus at the SEC and select a date for going public.

Advantages of an  IPO

  • It helps raise funds.

But, it also supports an organisation in generating funds via secondary channels.

  • Many public/private organisations release their stock to employees as compensation or a token of appreciation.

Selling the stocks of the public organisation is easier. Public organisations offer better job opportunities and attract more talent.

  • For public organisations, mergers are efficient as they can avail their public shares for acquiring any other business.

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Summing up

Getting investors nowadays is becoming easy as multiple channels are available for startups.

It would be best to make sure that all the points regarding the financial health of your startups are mentioned to your investors so that no disputes and ambiguity are going ahead.

Ensure that all the stakeholders are on the same page.

You only have to work on your pitch and presentation, applicable from the pre-seeding stage.

Check whether your idea is realistic and feasible.

You can do this with the help of statistical proof, such as market trends, bar graphs, pie charts, data analytical tools, and so on.

It would be best to have a high spirit and a purpose that can drive investors to give you funds and support you.