Types of funding for Start-ups

Great business ideas may remain theoretical until a creative mind finds a way to monetize them and make a profit out of them. Start-ups can use different ways to finance their businesses, including their own money or from family or friends’ loans. Apart from these means of financing, below we shall look at other ways how to raise funds for start-ups through different stages of venture capital financing or funding stages.

Explaining Series A Financing

No entrepreneur wishes to stay on one level all through the years. Of course, doing the same thing the same way and expecting different results is very impossible, and this implies to businesses, too. Every business founder wishes that their products be known and consumed on a wider geographic scale. These ambitions need funding and, in many ways, funds from self, or loans from friends and family may not be enough to achieve them. 

If a business succeeds in its first initiative to get off the ground with the funds available, it may opt for other sources of income or introduce outside investors into the business. The essence of these investors is to assist in raising capital by providing cash in exchange for equity or partial ownership to the company in question to fund it and make it progress more. 

This theory is what brings about rounds of funding which include Series A, B, C, and in other cases, D and E. All these Series involve capital raising through outside investors, with each being a little bit different from the other, as we shall discuss below.

What Are Funding Rounds for Startups?

Funding rounds refer to the stages that startup companies go through in order to raise capital. The company goes through several rounds of valuation, which will rise as the startup demonstrates its increasing likelihood of success, proof of concept, and client base growth.

Start-ups may be eligible for different types of funding rounds depending on the sector and the level of investor interest. Start-ups frequently receive “seed” funding and, at times, angel investor funding at the beginning of their operations.

If need be, the start-ups can add to the above funding sources Series A, B, and C funding rounds and other means to raise capital. Businesses that use personal savings, and contributions from friends or family (bootstrapping) may not suffice if they do not use Series A, B, and C funding rounds.

How Funding Rounds Work

The basis for funding rounds revolves around the founder, the company, and the investors. Here is how these three come together.

If you are a founder of any business, you would wish to grow your product prototype which may also need you to increase the number of employees and other essentials in your firm. 

This ambition will imply that you will need more funds to finance your business. Bootstrapping may not be enough, so you will need to look for investors who will offer outside funding.

Investors invest in start-ups and businesses they believe in. If yours attracts their trust, they would wish to invest in it with an aim to make a return out of it- this is the reason almost all transactions involving angel investors or private equity firms include equity in the company. The idea is that once the company starts making money, the investors will get their money back — plus an additional slice of shares for taking a chance.

These start-up companies looking for funds from investors begin with seed funding and then, later on, proceed to Series A, B, and C funding rounds after conducting a valuation. 

Once the company completes the valuation process, it then begins the funding round. The process and timelines differ from one company to another. Some may take months, while others weeks to get funds after a round depending on the company’s innovativeness and techniques.

What Is the Funding Valuation?

Funding valuation involves the assessment of the long-term financial health of a business. Those that undertake this process are business analysts with experience in how businesses work.

The valuation consists of the start-up’s maturity, market size, risk management, track record, and profit. All these valuation criteria will determine the type of investors the company will attract and the amount of capital it will raise.

Pre-Seed Funding

Pre-seed funding is the initial funding for start-ups and frequently occurs at the beginning of the funding process, before seed funding and other stages. In most cases, it involves founders beginning the company’s operations and trying to get things off the ground. 

The founders use their own resources or support from family and friends. Investors those fund startups during this stage may not do so in exchange for equity but basically to help the company start creating product prototypes. These investors are, in most cases, the founders of the same businesses. 

Seed Funding

To avoid confusion between pre-seed funding and seed funding, let us dig further to understand what seed funding is.

Seed funding is the financing of a company at the very beginning of its life cycle, which is typically anytime during the idea stage, having only a plan, or prototype, or in a trial phase, with no or very few customers. It is a stage that introduces outside investors for equity transactions hence interchangeably used with angel investing or pre-series A funding.

Seed funding means nothing different from the name itself. The first official income that the business gets and how it is ‘planted’ or utilized will determine if the business will grow or not. Also, note, the amount of capital raised during seed funding, the commitment of the investors, and the strategies the business uses to pick are great determinants of the future of the start-up.

These funds assist a business in doing market research and developing its products by employing a team to do so. 

How Seed Funding Works

All the typical equity sources, including angel investors, banks, crowdfunding, friends and family, and venture capital firms, can provide seed funding. Additionally, it’s not uncommon for startup founders to use their own funds as seed capital, allowing them to keep complete ownership of the company.

The most common funders in seed round funding are Angel investors who typically prefer riskier endeavors, such as startups with a scant prior track record, and anticipate receiving an equity stake in the company in return for their investment.

Seed-stage start-ups raise different amounts, but most statistics show that average, they raise between $ 10,000 and $1.5 million, which is not bad for a start-up.

Once the company in question gets the funds, it can decide on whether to get more funds from other series or not. However, most businesses feel that the seed funding is enough to get the company off the ground and get it running before considering other sources.

What Is Series A Funding?

Once a business is up and running, developing a product, doing market research, and going through the initial stages, it moves on to the next level of funding, called Series A. When a business decides to embrace this level of funding, it must have a strategy for creating a business framework that will yield long-term profit. 

Seed start-ups frequently have fantastic ideas that attract a sizable number of devoted users, but the company is unsure of how it will monetize the business. Even though investors in this funding series are looking for great ideas, they also wish to find a strong strategy to monetize or turn the business to profit. That is why you will find most start-ups in this category of funding valued at over 23 million dollars.

This is the stage at which a venture capital firm funds a startup, and these investors come from very established companies such as Google ventures.

How Series A Funding Works

Series A financing, in contrast to seed capital, adopts a wholly formal methodology. The majority of the investors in this round of financing are venture capitalists, and they are ready to go through the due diligence and valuation process before deciding whether or not to invest. Therefore, these procedures begin each significant series A funding.

The objectives of series A valuation fundraising entails identifying and assessing a company’s progress with its seed capital, in addition to the effectiveness of its management team. 

Furthermore, the valuation process demonstrates how well a company’s management uses available resources to generate future profits. Venture capitalists will only invest in a company after the valuation, and due diligence processes have been completed.

What Is Series B Funding?

Series B funding comes as a second stage of financing a business through investment which involves venture capitalists and private equity investors. The business has already passed the development stage, and it needs to pass to the next stage.

Companies that have undergone Series A and Seed funding rounds have established sizable user bases and shown investors that they are ready for success on a wider scale. Hence, the company will need Series B funding to meet these demand levels, which will include highly professional personnel, tech support, advertisement, and sales, among other necessities. 

How Series B Funding Works

Companies in a Series B financing round have developed their businesses, which has led to a higher valuation of approximately over $30 million by this point.

A Series B financing round gives businesses a variety of options for raising capital. Investors in the company through the Series B financing round typically pay a higher share price than those who invested earlier through the Series A financing round.

The other difference in series B is the addition of a fresh batch of other venture capital firms that focus on later-stage investing.

What Is Series C Funding?

The purpose of Series C funding is to get a business ready for an acquisition, an IPO, or a significant expansion that might involve an acquisition. Although some companies pursue additional rounds to generate more money, Series C is typically the final fundraising stage a start-up goes through.

In this round, investors put money into the core of profitable companies in an effort to get back more than twice as much.

Companies that look for Series C funding are no longer startups. They have a committed following of customers and a well-known brand, but they are still developing as mature entities. Companies that participate in this round of investments are valued at about $118 million and already have evidence of their success.

Due to the low risk, tested business model, and opportunity to support a company that could become worth billions, private equity firms, hedge funds, and investment banks frequently contribute to this round of funding.

How Series C Funding Works

Series C round of financing primarily focuses on capital raising through the sale of preferred shares, much like earlier stages of financing. Most likely, the shares will be convertible shares. They give owners the option to convert them into the company’s common stock at a later time.

Investors get lots of confidence to invest in such businesses because the companies have proven over time that their business model is competitive and successful. These new investors approach the table with the expectation of investing sizeable sums of cash into businesses that are already succeeding in order to support their own position as industry leaders.

Many of these businesses use Series C funding to increase valuations before going public. Companies seeking Series C funding in all cases have well-established, reliable revenue streams, solid customer bases, and histories of expansion.

Series C round is not the end financing for a company. It is only that most established companies choose to end here because it provides them with equity funds to run all their operations comfortably.

Some companies with a wish to develop globally and extensively would continue up to series D and even E even though they still can get millions of dollars in series C round of funding.

In most cases, companies that do pursue Series D funding typically do so for one of two reasons: either they need one last boost before going public, or else they haven’t yet succeeded in meeting the objectives they set during the Series C round of funding.

How to Get Investors for Start-Ups

Investors can only invest in start-ups if they see a future in them. Besides, investors have lots of benefits to your business which may include:

1. They help your company gain market share quickly.
2. They solidify the basis for your business.
3. They open your mind and eyes to more risks. For instance, you will not only rely on bank loans but additional sources of income.
4. They raise your business’s ambitions and standards.
5. You get access to your investor’s network.

If you have confidence in your business, you can use the ways below and others that we have not mentioned to get investors to fund your business and help you grow.

1. Consider online fundraising platforms
2. Attend events that have potential investors.
3. Take advantage of social media handles and post your business all through.
4. Write blogs about your business and what you do
5. Apply via accelerators and business incubators.
6. Share your product with the people you meet.

How Many Series of Funding Before IPO?

No business is limited to a set number of series or funding rounds before it goes public. However, three rounds of funding have proven to work for a successful IPO, because after series C funding, a business gets well established and their valuation is at par.

What Happens After Series C Funding?

After this round, many businesses might make use of Series C funding to raise their valuation in advance of an IPO. Additionally, this phase might serve as an exit plan for investors who want to get their money back.

If a company wishes to grow further and expand more their operations, they would ought to go for Series D to gather more capital to facilitate the same.

What Does Series D Funding Mean?

Series D funding comes fourth in company fundraising after utilizing series A, B, and C.  Companies undertake series D because they have discovered a new opportunity for growth before going public, but they just need another push to get there.

Another reason for going for series D funding is that the company has failed to meet the expectations set after its Series C round – this is known as a “down round,” and it occurs when a company raises funds at a lower valuation than it did in its previous round.

The Bottom Line

Most businesses fail to reach even their second birthday because of failure to plan and see the end of the business before it starts. Apart from having great ideas, money is very essential for any start-up to progress, and of course, bootstrapping may not work for everyone.

That is why it is important for you as an entrepreneur to understand how start-up funding works, and its process and know at what point you will initiate them in your start-up and what is expected of you.

Different rounds come with different demands, but the basic thing is that if the first round works well and you are able to move the business off the ground, you can also utilize other Series, go global and even initiate an IPO.

General 

Hopefully the information on start-up funding rounds will help you as you try to monetize that business idea you have been thinking about all through. Knowing how start-ups get funding is essential and a basic step to get you going.