Your startup needs funding to keep the business afloat, employees content, and the momentum going on. And raising funds for your company is not an easy task. In fact, it is necessary to understand the different stages of startup funding before you even make a move. Why? Because getting an investor for your idea or concept is not tough in this fiercely competitive startup ecosystem.
Gone are days where to start a business, you could borrow from friends and build a firm. Startup funding demands a professional approach. You need to understand the stage in which your startup is and identify investors accordingly.
There are two stages of funding your startup: The early stage and the growth stage. Let us dive deep to understand the types of funding in the above two stages.
Startup Funding in Early Stage
As the name suggests, looking for financing options in this stage is equivalent to finding an investor who likes your idea and is ready to invest in it.
Pre-seed capital covers the very first step involving financing an idea or a prototype that you want to grow into a full-fledged business. The funding for this stage comes from the following sources:
- Fools, Friends, and Family: These are your first go-to solution for financing your startup at its infancy. They believe in your idea and are ready to invest in it so you can commence your dream project.
- Business Angels: As the name suggests, these are the angels who are ready to back you with their own money at the riskiest stages of your venture. Business angels are previous startup founders who may not have a sound technical background but are keen on investing their own money in startups in the very first stage. This category of investors is pretty important in a startup ecosystem.
Seed capital is the funding you need when you are trying to start a company and find a product-market fit. Early-stage Venture Capitalists, business angels, and super angels are the major category of investors in this type. But these are not the only category. You can also receive financing from other players too.
- Crowdfunding: Crowdfunding works in two ways. If it is a hardware startup, the financing is termed reward-based crowdfunding. The investors will back the projects they like and take something in material form in return without taking any equity in your firm. The other is equity crowdfunding, where investors get equity in return for the investment they make. Thus, they become the shareholders of your company and can participate in the future returns your startup might provide.
Startup Financing in Growth Stage
This type of startup financing happens when you have a functional company but are looking for funds to grow and scale your business in the targeted market. There are different types in this stage as well.
If your startup has reached this stage of funding, it signifies that you have figured out your product and the market segment for it. You now need financing to establish a business model and scale. Series A, and the previous stages of startup funding, are riskier for investors, considering the doubts involved around startups.
Series B funding is for the growing startups that have a working business model and an established user base. It is the second round in the series funding. Private equity investors and venture capitalists invest in firms that have met some milestones. The Series B investors usually opt for convertible preferred stock instead of common stock. The investors pay a much higher share price compared to Series A funding.
Series C and other stages
Mature companies are the ones that reach the Series C funding stage. Whether the company is making profits or not, the business model is working well, and it also has an established user base. Financing in this stage involves hundreds of millions. Besides the enormous amounts invested, Series C and other stages also involve private equity firms, investment banks, and large Venture Capital firms as well.
This funding more or less lays the foundation for an initial public offering (IPO) or getting acquired by a larger, much bigger company.
These are various funding stages for a startup. Have you got a startup plan? Or, are have you reached the funding stage? Let us know in the comments below.