From Seed to Series: Types & Stages of Startup Fundraising
To help you find your way, this offers a clear and detailed map of the funding landscape. From the initial seed to the more advanced series rounds, we delve into each stage and type of fundraising.
For early-stage ventures, in particular, access to funding can mean going from an idea to making a real difference in the world. In the last article, we discussed how important it is to ensure investment readiness in your startup.
Today, we'll explore the important role that startup fundraising plays for budding entrepreneurs. From angel investment to venture capital, from seed funding to series rounds, we'll also uncover the various avenues through which startups can access the capital they need to turn their vision into reality.
Startup fundraising is the lifeline for founders. It offers the financial support needed to get businesses off the ground, cover essential expenses, and hit key milestones on the path to growth and success.
This funding can come from a variety of sources, each playing its part in the startup journey.
Types of Startup Fundraising
From scraping together personal savings to attracting multimillion-dollar investments from venture capitalists, the journey of funding a startup is as diverse as the startups themselves. Here are several types of startup funding or investment-
Bootstrapping
Bootstrapping is like starting a journey with a backpack you packed yourself, using only what you've saved up, the money your startup brings in, or perhaps a little help from friends and family.
It's all about stretching every dollar, being creative in solving problems, and smartly scaling your startup without taking on big loans or giving away pieces of your dream to investors.
Equity Financing
If you're a founder looking to fuel your business's growth without shouldering more debt, equity financing might be the route for you. This approach involves selling ownership shares in your company, effectively turning investors into part-owners.
In exchange for their investment, these shareholders now have a claim to future profits and a say in key decisions. It's a popular strategy among startups and expanding businesses because it allows you to raise substantial capital.
Debt Financing
Debt financing is a way of raising capital by borrowing money that needs to be repaid over time, usually with interest. This method enables businesses to acquire funds without relinquishing ownership or control of the company. Common sources of debt financing include bank loans, bonds, and credit lines.
Crowdfunding
Crowdfunding is a way to raise capital by collecting small amounts of money from a large number of people, usually through online platforms. Think of it as a massive online community bake sale, but instead of selling cookies, you're sharing your vision. You tell your story, get people excited, and they pitch in with little bits of money to help turn your dream into reality.
In return, you might offer them a sneak peek at your product, a share in your company, or just the good feeling of being part of something new and exciting.
Grants
Grants are financial awards provided by government agencies, foundations, or other organizations to support specific projects or initiatives. Unlike loans or investments, grants do not need to be repaid, making them an appealing option for startups and entrepreneurs who are full of ideas but might be short on cash.
These are just a few examples of the types of fundraising and investment options available to startups. The choice of funding depends on factors such as the stage of the startup, its growth trajectory, funding requirements, and strategic objectives.
Stages of Startup Fundraising
Various funding sources exist for startups, but it's essential to align the funding source with the startup's operational stage. The stages of startup fundraising/investment represent the progression of financing rounds as a startup evolves from a fledgling idea to a successful and sustainable business.
“The average time between funding rounds from Seed to Series A is 18 months, Series A to B is 10-18 months, and Series B to Series C is 27 months.”- Carta
Source: https://medium.com/@themain_stage/how-funding-works-for-startups-a-guide-to-funding-rounds-fc68ff820607
Each stage serves a specific purpose in fueling the startup's growth and development, with the ultimate goal of delivering a return on investment to stakeholders.
Pre-Seed
At this early stage, the startup is in its infancy and may consist only of an idea or concept. Funding at this stage often comes from the founders' personal savings, friends, or family. It is used to conduct initial market research, develop a prototype, and validate the business idea.
During the pre-seed stage, which is among the earliest phases of startup funding and often a prime time for bootstrapping, the startup investment can be up to INR 10 Crores.
Common pre-seed investors include:
Family or friends
Angel Investors (External Startup Founders)
Micro venture capital firms
Seed
The seed stage occurs once the startup has developed a prototype or minimum viable product (MVP) and validated its market potential. During this initial phase of startup funding, entrepreneurs typically raise capital to finance their foundational steps, such as conducting market research, assembling a founding team, identifying the target audience, or assessing the product's viability.
While the pool of potential investors largely overlaps with the pre-seed round, there's a notable addition of angel investors. These individuals fund early-stage startups in exchange for equity ownership in the company.
In terms of investment, companies at the seed stage typically receive up to INR 25 Crores.
Common seed investors include:
Family and friends
Angel investors
Crowdfunding platforms
Micro venture capital firms
Incubators
Government schemes & grants
Series A
Series A funding is typically the first institutional round of financing raised from venture capital firms. At this stage, the startup has gained traction, demonstrated market demand for its product or service, and is ready to scale its operations. Series A funding is used to accelerate growth, expand market reach, and strengthen the team.
At this stage, investments are made up to INR 100 Crores.
Potential investors in Series A rounds include:
Super angel investors
Venture capitalists
Accelerators
Series B
Subsequent rounds of funding, such as Series B, C, and beyond, occur as the startup continues to grow and scale. Series B funding is typically larger than the seed or Series A rounds and involves additional venture capital investment. The funds raised in this round are used to fuel further expansion.
Companies at the Series B stage typically receive investments of more than INR 100 Crores.
The common Series B investors are-
Late-stage Venture Capital
Corporate Venture Capital
Private Equity Firms
**Corporate Venture Capital is a good option for Series B and beyond.
Series C
At this stage, the businesses often aim to develop new products, expand into new markets, or even engage in brand acquisitions through the startup funding process. During the Series C stage, new investors emerge to contribute to a company's stable revenue stream.
Common Series C investors include:
Private equity firms
Hedge funds
Late-stage venture capitalists
Although additional funding rounds, such as Series D and E, are available, the businesses eligible for these rounds can no longer be considered startups in the truest sense. The funding raised in rounds like these, often totaling hundreds of millions of dollars, is primarily allocated for global expansion, market domination, or to enhance the company's valuation prior to an initial public offering (IPO).
Exit
The exit stage occurs when investors realize a return on their investment through a liquidity event such as an acquisition or initial public offering (IPO). This allows investors to cash out their investments and provides founders and early employees with a financial reward for their hard work and dedication.
Here is a table that summarizes what we’ve discussed above.
Source: https://medium.com/@themain_stage/how-funding-works-for-startups-a-guide-to-funding-rounds-fc68ff820607
Ending Note
Raising funds for your startup might seem tricky, but once you get the hang of the basics, it gets easier. Think of startup funding like climbing a ladder, starting with seed funding at the bottom and moving up to Series A, B, and C rounds. Each step has its challenges and perks.
It's also super important to get the nitty-gritty details right, like how much your company is worth and the fine print in agreements (like what happens if things don't go as planned or how deals with investors work out). These details can save you headaches down the line.
As you keep climbing that ladder, keep showing you've got what it takes (traction) and make solid connections with investors. But remember, getting funds is much more than raising some hard cash, it's about creating a business that lasts and grows.
To conclude,
“It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So plan for that.”
–Richard Harroch, Venture Capitalist and Author
This edition of Disruptor Diaries is a collaboration with Jagriti Shreya.
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