Even with a brilliant business idea, funding is often the sticking point for beginners. This guide takes you through all the startup funding rounds to know.
While some startups fail because they didn't create what their target audience wants, a bigger group fails due to a lack of capital. According to the U.S. Chamber of Commerce, 82 percent of small businesses fail due to cash flow constraints.
A startup is more than just a great idea. It requires external funding rounds to establish its ground and be successful.
Do you have a startup and wonder how you can launch it to fruition? This beginner’s guide will take you through the main startup funding rounds you should know.
Key Takeaways:
- The rounds of startup funding include pre-seeding funding, seed funding, Series A funding, Series B funding, and Series C funding.
- Startup funding typically comes from friends, family, accelerators, incubators, angel investors, and venture capitalists.
- One round of startup funding can take between a few months and a year or more.
- Potential investors are not just looking for great business ideas. They're looking for solid business strategies that can turn the great idea into a money-making undertaking.
What Are Startup Funding Rounds?
These are a series of investments that raise capital for a startup. Each funding round will serve as a stepping stone as the business grows and becomes successful. The whole process can take just a few months or several years, depending on how profitable your business is (or will be).
As a startup founder, note that potential investors are not investing in your present or past. They're investing in the future of your business. Therefore, have a pitch deck that vividly describes where your business is from and where it’s headed.
The 5 Stages of Startup Funding Explained
For a completely new startup, funding rounds begin with an initial pre-seed round and seed round, and then progresses to Series A, Series B, and Series C funding. A funding round typically takes three months to over a year depending on your investors, business, and industry.
Stage 1: Pre-Seed Funding
Also known as pre-seed money or pre-seed capital, this funding round is the small capital you get to launch your business. Often, this funding comes from family, friends, and close investors. The people who invest in this stage usually get a stake in the company in exchange for their capital.
Before seeking pre-seed funding, ensure you have a convincing elevator pitch and have clearly defined your:
- Business model
- Value proposition
- Competition
- Market opportunity
- Barriers to entry
Even if your initial investors are close family and friends, you still need to pitch to them like any other investors. This means you have to prepare the necessary paperwork including partnership agreements, incorporation papers, and relevant certificates.
Stage 2: Seed Funding
This is usually used for further research, product development, testing product-market suitability, and making key hires. The seed funding comes from angel investors, incubators, and accelerators.
Most of the investors in this stage use the spray-and-pray model of investing. In this model, investors fund several new companies and identify the ones that pick up traction. They'll then allocate more money to the startups with the potential for further development. This means that your sales pitch and strategy execution process should be convincing enough to bring in more investors for quick scaling.
Stage 3: Series A Funding
This is the first round of venture capital funding. At this stage, the business should have a developed product with predictable revenue growth.
Series A funding allows startups to optimize their value offering and scale across different markets. Therefore, create a plan that'll generate profits in the long haul and not just in the short-term.
A good way of identifying the best Series A investors for your startup is using the 30-10-2 rule. You'll reach out to 30 potential investors who may be willing to invest in your business. Ten of them might show interest in your proposal, and two may actually fund the business.
Keep in mind that investors in this stage are not just looking for great business ideas. Rather, they're looking for solid business strategies that can turn the great idea into a money-making undertaking.
Often, funding at this stage comes from traditional venture capital firms and angel investors.
Stage 4: Series B Funding
At this stage, the business is past the development stage. It is well-established with a large customer base and has proven to investors it's prepared for success on a larger scale. This funding round is all about taking your business to the next level by expanding its market reach.
Series B funding is usually used to bulk up on advertising, sales, tech, space, support, workforce, etc. Series B phase is quite similar to Series A in key players and processes.
In Series B funding, most businesses often use their previous investors due to familiarity, trust, and convenience in reporting. Early investors from Series B may want a stake of the company, especially if it looks to have a promising future. Therefore, they may lend more — boosting your chances of scaling up.
Stage 5: Series C Funding
In this stage, the company has proved its mettle and success in its niche market. The Series C funding can be used to acquire greater market share, develop more products, and secure acquisitions. Besides venture capital firms, you may also get funding from banks, private equity firms, and even hedge funds.
It's usually the last stage in the startup growth before issuing an Initial Public Offering (IPO). The valuation of the company at this point is based on hard data points. This funding round is usually an exit strategy for the venture capitalists.
Scale Up Your New Business Fast with Startup Funding Rounds
Before looking for more funds for your startup, you need to first evaluate your revenue and initial costs. You may find out that if you maximize the little you have, you may not need as much funding.
Note that getting through all the startup funding rounds is no walk in the park — investors may turn you down several times. So, whether you receive funding, another meeting, or a rejection, always keep an open mind, ask for feedback, and strive to make the necessary improvements on your next pitch.