It’s not always easy to ideate a profitable product or service from scratch. The logistics of funding is often the biggest hurdle in the first stage of a startup. During this stage, you, as an entrepreneur, create a product/service while looking for the ideal problem-solution fit. This involves having clear definitions of the problem and the solution to that problem.
If you need external funding for your startup, this stage poses the most difficulties. Thus, most startup entrepreneurs in the idea stage resort to bootstrapping. This may involve using your income and savings to keep your business afloat (for now).
If your own resources aren’t enough, you can resort to an FFF Round (aka, the ‘Friends, Family, and Fools’ round). Here, you can use your personal relationships as sources of funding. This is often necessary as, without a Minimum Viable Product (MVP), there’s no tangible proof of concept for external investors to appraise and invest in. Consequently, there’s nothing to suggest that they will get a return on their investment, so they wouldn’t be willing to risk investing. Friends, family, and fools, on the other hand, don’t need as much evidence to help their loved ones out.
In the pre-seed (or MVP) funding stage, there are several things you’d need to complete to ensure that investors see the value of your product.
One of these involves having an MVP that shows early signs of growth. A skilled team with industry-relevant experience should be behind the MVP. This may help with proving its product-market fit. Ideally, your start-up would also be generating revenue already, thus showcasing your product’s viability. If investors see your startup’s potential and growth over time, they will be more willing to invest in it.
When it comes to seeking out investors, there are three main types to look for: angel investors, accelerator/incubator programs, and venture capital (VC) funds.
Angel investors refer to individuals who make monetary small-scale contributions (think $25-100k). Accelerators or incubator programs exchange investments for equity and may offer extra support such as training, resources, and networking opportunities. Lastly, VC funds can be sought for larger investments. Yet, note that these investments may take longer to effectuate.
Seed – Product Growth
The seed stage of funding a startup is akin the planting a tree. It’s where you can plant higher-value investments into your startup. If you then water the startup with nourishments (e.g., business strategy, a skilled team), it can flourish and evolve.
This stage of a startup often persists for several years. It involves turning the MVP into a scalable product that serves its customers –– hence creating a product/market fit. If this is successful, –– and the product generates a continuous stream of customers, views, and other such relevant metrics –– investors attribute a higher economic value to your startup venture. You can then use these investments to fund developments essential to your startup’s growth.
Similar to the pre-seed stage, investors in the seed stage may include angel investors and Venture Capital (VC) funds. One key difference, however, is that the amount of money invested during this stage is higher, between $500k and $2 million. Yet, this depends on the valuation of your startup.
After you have made it through the seed stage, the Series A round is a milestone every startup should celebrate. Startups often reach this stage once they have an established user base and are obtaining consistent revenue.
During this stage, investment procedures become more formal. You can perceive these to be your first important round of large venture capital funds. Due to the heftier investments, venture capitalists have standardized procedures where they act by due diligence principles. This ensures that they undertake an appropriate valuation process before their investment decisions. These decisions often emphasize equity-based financing. This involves exchanging capital with the startup company’s shares.
The nature of these shares differs and often depends on how you want to distribute these. You can choose to issue preferred shares that provide owners with voting rights or distribute convertible shares. Convertible shares allow investors to convert preferred shares into common stock at a future date.
The Series A stage aims to continue garnering financial support. This ensures your startup’s growth, which further propels investors to invest in your venture.
Once the Series A stage has concluded, later Series ‘X’ stages may follow. Each subsequent funding stage serves different purposes under the umbrella of company growth.
Series B usually entails investments worth $7-10 million. Startups often use these to increase their customer base and number of employees.
Next, you may seek Series C to fund your increasingly successful business. Series C investments average at $26 million, with startup founders using these to continuously scale their company. For accelerated growth, you can invest this sum in R&D, breaking into new markets, and acquiring other entities. Reaching the Series C funding stage also implies that your startup is no longer a startup, but rather an established company.
During Series D funding, things get more complex. When companies seek to raise a Series D, this can mean one of two things: they either see more room for expansion and need more funds, or they haven’t met prior expectations, resulting in them receiving fewer investments than in previous rounds. Hence, there’s wide variation during this stage.
Lastly, Series E funding is uncommon. Companies may resort to Series E if they want to remain private for longer or need more help before they go public.