How Startup Funding Works
Regardless of raising a technical or non-technical startup, every founder needs to understand how the funding works. If you are keen to learn about the funding processes in the startup sphere, this article is for you.
First of all, funding is not a given process. Even the most brilliant startup idea needs to get those processes running. So, how do funding works and what are the main stages and rounds?
What is the funding round?
Each time startups gain impactful investments to their business is called a funding round. Each round is typically designed to give them enough capital to go to the next stage of their business.
The names for the rounds may vary depending on the industry. However, they all follow the same principle and based on the same ideas. Now let’s take a look at these funding rounds and how they work and what sets them apart from each other.
Pre-Seed Startup Stage
This stage commonly does not include any funding and considered a more preparational one. This period refers to a period of time when a company makes all of the preparations to attract investments to the startup project. However, there can be some funding in the form of family or friends’ investments for business idea evaluation and all of the earliest company’s requirements to establish a funding campaign.
What is a “Seed” Stage?
Seed capital is the starting funding that is used to start the development of a business or a new product. Seed capital attraction is the first step of business establishment.
The “Seed” stage is the first actual stage of startup funding. Establishment of successful startup business idea and first revenue will affect the future growth of your startup. However, despite seed-stage being the earliest stage of startup funding, it can include investments that can vary from $10 000 to 2 million. Most companies raising seed funding are valued at somewhere between $3 million and $6 million.
At this stage, the startup is an already established company with a defined business model and vector of its strategic development. Typically, Series A rounds vary from $2 million to $15 million.
At this stage, your investors won’t look just at the idea of your startup. Series A requires from startup companies to have the fundamental strong business that will become a money-making successful company, to attract the investments. Unless your startup has been acknowledged as a “unicorn” you need to have a strong strategy to run successfully at this stage.
The Series B stage of startup funding is all about business growth. Companies at this stage already have passed the development stage and now are focusing on the market expanding and the increments in their user base.
Investors help startups in growing and stabilization on the market. The estimated capital raised in a Series B round tends to be somewhere between $7 million and $10 million. However, if the company has gained a lot of success at the previous stage, the numbers can be higher and vary between $30 and $60 million.
At the Series B stage, you need to focus on the talent acquisition to take the sales and marketing of your company to the next level and increase the overall market of your product or service. The investment attraction at this stage is similar to the Series A round.
At this stage all the processes of the company are well-established and the most actual need for the business is scaling. The investments at this stage are required to expand to new markets, development of new products or even acquirement of other companies. Series C is all about the scaling and growing furthermore. For this stage, the average number of investments often starts from $100 million and more.
Investments at this stage are the safest because of the company’s general success. At this stage, the investors are easily attracted to participate in funding for companies that are already thriving.
Commonly, after passing this stage the company is no longer considered a startup and is not looking for investors to help them. However, some of the companies may take their business to the D and even a Series E stages.
Understanding the difference between the startup round will help you to evaluate the strategy of your particular project development. The general idea of startup funding is that investors offer their money to take in return for an equity stake in the business. Between these rounds, investors rely on the different aspects of a company, which is key to define their potential.
If you want to learn more about startup development, check out our other articles in our blog.
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