5 Stages of Startup Fundıng
5 Stages of Startup Fundıng
Regardless of where you are in that startup life, you need money to keep the lights on, the team happy, and the momentum going. Raising money may not have been your dream when you began building the company, but your ability to do so will determine how far it will go. Understanding the different needs at each stage of funding will equip you with the confidence to engage investors with a clear pathway to what you each will get out of the exchange. The five stages outlined below provide a foundation to get youı started.
1) Seed Capıtal
Seed capital is the earliest source of investment for your startup. Sources will include channels relied upon since childhood such as the Bank of F&F (friends and family), crowdfunding, credit cards, or your personal savings. No matter whom you raise money from, there is no free money, and interest on their investment in your startup should be clearly defined. Strive to provide tangible deliverables and milestones and update them regularly on your progress. The purpose of the money you are raising at this stage is commonly focused on research and development for an initial product, or an MVP if you do not have one.
If the funding sources described above aren’t available, seed accelerators such as Y-Combinator, Techstars, and 500 Startups are potential options. Accelerators are investing in both your startup and your potential to develop and pitch your solution to potential investors. Take the time to prepare, research, and validate your idea before approaching an investor for a higher likelihood of acceptance.
2) Angel Investor Fundıng
Eventually, as your startup’s needs grow and you need to either scale or increase funding toward product development, marketing, or just to expand your team to keep up the momentum, you may look to angel investors as a solution. If your startup is raising money at this stage, your business model canvas should be proven.
Accredited angel investors, as defined by the SEC, are individuals who have a net worth of at least one million dollars and an annual income of at least two hundred thousand individually or three hundred thousand jointly with a spouse. Angels differ from other investment entities such as Venture Capital firms since they are using their own money and should be treated as such when solicited for funding. They may invest individually or also pool their money with a group.
Since the money raised at this stage can be significantly higher than in the seed round, investors will also expect a compelling and well-researched pitch.
3) Venture Capıtal Fınancıng
Venture Capital Financing can provide resources to scale the business to new business channels, customer segments, or to increase marketing efforts for additional customer acquisition. At this stage, your startup is either profitable or could benefit from offsetting the negative cash flow with this new wave of investment while the business continues to grow. Multiple rounds of funding at this stage may happen, and investors may also offer to join the organization and provide additional expertise.
Expect due diligence from your potential investors and prepare to answer questions–all kinds of them, and often. Learn the various offerings commonly provided at this stage such as equity, SAFE (Simple Agreement for Future Equity), and convertible notes. Since VCs are investing other people’s money, their job is to make a sound investment in businesses that are likely to yield a meaningful ROI for their clients. VCs vet startups regularly, so when you pitch to them, be engaging and be prepared.
4) Mezzanıne Fınancıng & Brıdge Loans
At this stage, your startup is growing and looking to scale significantly with a commercially available product. Revenue should be coming in regularly even if the startup is not yet profitable. The funds raised at this point will be geared toward expansion to new markets, mergers, acquisitions, or preparing for an IPO. Investors at this stage want to see a clear roadmap toward profit shortly. For example, mezzanine financing can cover the expenses that an IPO involves. With the profits made from the IPO, the mezzanine investor is paid back with interest.
5) IPO (Inıtıal Publıc Offerıng)
This is not the end goal for all startups. However, if you have raised money through each of the preceding stages, going public is an option to expand further. All of the investors who have traded their money for equity until this point will ideally recoup their investment along with additional profit. Some investors may retain their shares, but don’t be surprised if many of them sell their stock at the beginning to reap the rewards of getting in early. After the IPO, stock options for a growing company can be leveraged to attract top talent and the increased access to capital can provide resources to push the momentum of your business forward. Once you are on the NASDAQ, just remember to stop calling yourself a startup, you are in the big leagues now.