Finance and funding issues remain fundamental when it comes to startups. Begining just with the idea is not an easy task due to the high fail risk factor so it’s important to spend time planning every step, including attracting financial support. And here come the questions: Which funding options are available? Where find investors? What is the funding round? What are the differences between them?
We meet a ton of potentially great business ideas but not so many of them make it to the “Big Launch” due to the lack of planning and understanding the whole process. We hope this article, knowing how investment rounds are divided and what requirements for startups should be met can help greatly on your journey.
Summarizing funding options
Let’s start with the most realistic options so far. Actually, on the different rounds and stages, founders use them all depending on their plan and overall suitability. Later describing the stages we will talk about it in more detail.
Here they are:
2. 3F’s (Friends, Family, Fools)
3. Bank Loan
4. Venture capitalists (VCs)
5. Angel investors
7. Strategic partnership
The important point to mention is – even before reviewing the options it’s fundamental to work on the business plan. Different types of investors will need to see financial projections before they even consider funding your idea. It should be a clear description of your business, starting from the core idea to the financial plan for 5 years. The more details – the better.
How Do Funding Rounds Work?
Overall the whole process of fundraising has similar steps on each stage in each round typically includes the following steps:
— Gathering data
— Preparing the presentation
— Research investors and platforms
— Attend investor meetings and pitch
— Agreeing on the terms
— Relationship building with investors
One of the key differences between funding rounds relates to business metrics, as well as the level of maturity and growth potential. In turn, these factors impact on the types of investors that may contribute, as well as the reasons a company may seek new capital.
Usually, there are: Pre-Seed, Seed, Series A, B, and C but it doesn’t just stop on C round, they may go on.
So What Is Pre-Seed Funding?
It’s the very first stage the founders usually invest their own resources to start a business, attracting 3F’s (Family, Friends, Fools). In this context “Fools” are the inexperienced people who could make an investment and not fully understand the risks. Also, founders may consider getting grants or funds from private investors who specialize in their industry, additional options- small business loans, crowdfunding, and sometimes accelerator programs.
The main focus of this stage are to polish the business idea, select an activity vector, and working so the product will stand out. In a typical pre-seed round, the founding team gets a small investment to achieve one or more of the milestones needed before “true” seed investment. For the investor to see the activity and the ways of working, potential.
Average Funding Amount: <$1 million
Typical Company Valuation: $1–3 million
Common Investors: Friends and family, early-stage angels, startup accelerators
Checklist. What needed to be done for the PRE-SEED stage:
+ Formed the core Team
+ Polished and ‘Selling’’ Idea you can present
+ Business plan
+ MVP — Minimum Viable Product
+ Defined Target Audience and Market?Confirmed demand
What Is Seed Funding?
The second stage of investing focus growth of a startup building up a marketing, sales strategy along with working on the client feedback. The task of a startup at this stage is to find and use cost-effective channels with the help of new investments. Simply put – scaling the client base and overall company while not increasing the staff.
Beyond mentioned earlier investor options for pre-seed, for seed fundraising, there are few new options. One of them – Angel Investors. They invest their free financial capital, often accompanied by accumulated knowledge, expert opinion, and contacts. Another great option – accelerator programs. Accelerators offer knowledge and contacts to help with business development.
Average Funding Amount: $1.7 million
Typical Company Valuation: $3–6 million
Common Investors: Angels, early-stage VCs, startup accelerators
Checklist. What needed to be done for the SEED stage:
+ Go-To-Market strategy built and implemented
+ Market and results research showing the progress.
+ Clear reasoning the concept worth pushing it further to the market.
What is Series A Funding?
This is the stage of rapid growth. At this point, startup attracts not only money but also expertise and connections, that might help a startup grow big. Usually, strong startups in this phase can already choose who they would like to see on their list of investors. Generally, Series A funding gives a startup several years to develop its products, team, and begin implementation of its go-to-market strategy.
Average Funding Amount: $10.5 million
Typical Company Valuation: $10–15 million
Common Investors: VCs, “super” angels
Checklist. What needed to be done for the SERIES A stage:
+ Market and results research showing the progress.
+ Strong professional network of experts and investors
+ Profs you’re trustworthy and capable
What is Series B Funding?
At this stage, a startup project is on the market for quite some time. So Series B round is focused on increasing competitiveness, standing out and scaling the target audience. The main goal of this stage – become a profitable project. Investment risk is lower, therefore the amount of financing is higher than in Series A.
In practical terms, Series B investment might allow a startup to make expansive hires (across business development, strategic accounts, marketing and customer success), expand into different market segments or experiment with different revenue streams, and in dramatic instances, even buy-out businesses that offer a competitive advantage.
Average Funding Amount: $24.9 million
Typical Company Valuation: $30–60 million
Common Investors: VCs, late-stage VCs
Checklist. What needed to be done for the SERIES B stage:
+ Research comparing company performance with other competitors
+ Revenue Forecast
+ New strategies and vector of movement defined
+ Target audience scaled
What is Series C Funding?
In round C, a company increases its shares in the business and begins to make substantial profits. It is in this round that a company becomes profitable and capable of independent development without further support.
Further rounds are possible if there is a need for a significant increase in production or the potential to sell a company to a strategic investor.
Average Funding Amount: $50 million
Typical Company Valuation: $100–120 million
Common Investors: Late-stage VCs, private equity firms, hedge funds, banks
Dividing startups by investment rounds gives a clear idea of how the business cycle looks and with what dynamics startups are developing. Not all startups go through each of the rounds and often rounds are combined or intermediate ones allocated.
But in any way, it’s important to know their specifics even before starting the process for proper planning and business strategy.