The internet and technology have increased the possibilities for individuals to innovate. This has led to a large increase in the number of people considering starting a business. If you have a great idea or are considering starting your business it might be difficult to know what to expect. In this article we’ll discuss the different stages of startup funding and the different approaches to getting investors on board.
What are Funding Rounds?
Whilst you might think a loan from a bank may assist you start your business, it’s rarely that simple. Often startups will need to reach out to people looking to invest in young businesses. These investors are ideal as they have a bigger appetite for risk.
This kind of funding can come from individuals or groups and it can vary in size and frequency. This means that startups will often receive some funding, use it all for the running of their business and then need to search for more funding. These searches for funding are often described as funding rounds. By organising funding in rounds a startup can pool money from different investors into a big group for use.
For example, company A searches for funding for one month. It receives investments from 8 different investors who each contribute $5,000 to the business. This funding round sees the business raise $40,000. This amount of money will allow company A to operate and expand its business for anywhere between 6-12 months before it needs to raise another funding round.
Pre-Seed
Pre-seed is the very first chance a startup has to raise capital for the operating of its business. At this stage, the business will not yet be trading or will be in the very early stages of trading. This will mean that investors are mainly judging the business idea and vision rather than the business’ sales or other figures. This round is sometimes informal and can see family and/or friends invest in the business. Other investors in this round might include angel investors.
Seed
This is the beginning of a startup’s funding journey and often the first formal funding round a startup will raise. Taking its name from the concept of planting a seed to grow a plant, this round’s main aim is to begin bringing a business idea to life. Whether this means conducting thorough market research, product development or hiring essential staff this round is about investing in the foundation of the business.
A typical seed round may see investment from incubators, venture capital firms, angel investors or even targeted funds. Often this might be the end of a funding journey for a startup as they may not be able to succeed in creating a business or they might succeed so much that they do not require any more funding.
Series A
Businesses who seek series A funding have generally gained some traction or at least proved their concept. Investors will be looking for data and financial figures as indicators to how the business is going. These figures might be the number of sales, operating costs or even marketing figures such as cost of customer acquisition.
Investors might be the same investors as those in the seed round or bigger investors with particular expertise. They might include hedge funds, private equity firms, venture capitalists and/or angel investors.
Series B
This round of funding is for businesses who have real traction and are looking to build on their successes. Funding in this stage might be used to expand a product range, hire new employees or expand into new markets. Investors at the series B level are often venture capital firms.
Summary
Fundraising is a common process that many startups go through. Whilst the individual circumstances and number of rounds may vary greatly, most startups are all looking to grow and expand their business with a view to eventually turning a profit.
