Types Of Funding In A Startup
Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations.Steve Jobs
Very few founders have a lot of money to invest in their startup projects. Then again, some companies require substantial financial resources to get started. Remember the “Affordable loss principle” I have discussed earlier in “what is your why” topic. Instead of borrowing money to produce 10 products at a time, produce one product, start selling, earn money, and then produce the next product.
There are total of six common stages of funding in a startup. Following are these:-
- Pre Seed Funding
Pre-seed funding or pre-seed capital is the first and most crucial step for a startup. This is also known as “Bootstrapping”. In this stage, you use your own resources, friends, and family members. This fund is used in doing various feasibility tests and market research.
- Seed Funding
It is the official equity funding stage in which a company raises funds to finalize products and location of the business. Generally, you are in the phase of launching your product, developing the market of your product, and creating an initial level team for your startup. At this stage, possible investors may be Angel investors, your friends, and family, crowdfunding, etc. Crowdfunding is a process to fund a project by raising the required funds from a large number of people.
- Series A Funding
This is the 3rd stage in funding and 1st series in venture capital funding. This is the stage where your startup is set in terms of products and its market This is basically raised to fulfill working capital requirements, recruitments of key employees and to scale your market. Normally startups provide preferential stocks to their investors in this stage. Possible investors are super angel investors and venture capitalists. Sometimes these funds may be generated through some accelerators whose main vision is to accelerate your startup’s working business model.
- Series B Funding
Now, coming to the second series of venture capital funding, in this stage, your startup has passed the development stage. Now, your startup is scaling up and increasing its market share. You may also be ready to build up a high-quality team and to outlive your competitors. Possible investors in this stage are venture capitalists and in later stages venture capitalists too. One thing that should be in your mind about venture capitalists is that every venture capitalists don’t provide all types of series funding so you need to approach the right VCs according to your startup stage.
- Series C and higher funding
Now, you are ready to raise more funds to build new products, a new market, or maybe you are thinking of acquiring other startups. This is the stage where your focus is on the expansion of your business, increasing your market share and you start to track IPO’s. Possible investors in this stage are late stage VCs, private equity firms, hedge fund providers, and banks.
- Initial Public Offers (IPO)
If you will reach this stage, then, first of all, I would congratulate you because now you are one of the very few startups who achieve this stage. IPO is a process of offering your company’s shares to general public. As a startup, your primary goal should be to reach this stage, if you are willing to do your business successfully. This is the stage where you enter a corporate world whose main focus is to build a growth oriented team, to stabilize financial situation, to release all earlier investors and debts, to build good corporate governance and to achieve positive market sentiments. Potential investors are general public and some institutional investors.
To know more in detail read my book "Startups- Your Way To Success" which is available on Amazon.