Different Startup Funding Stages: How It Works & What To Expect
Globally, a lot of people have the misconception that to start a business you need to have your own source of income and not rely on banks or other financial institutions for money. While the above might be true for the very initial stage of funding, it is not true for startup funding stages.
Further, in the past five to 10 years the scenario has completely changed as the government is now promoting people to start their own business and is providing them with many more startup funding options than before.
Before we move on to different startup funding stages, please have a look at the Revenue – Time graph below which will help you understand at which stage you will use which part of the funding.
I know at present the above graph looks daunting, but as we move on to discuss the different stages of startup funding, it will become clearer.
Here are five startup funding stages that will help a new business survive and grow as time progresses.
1) Seed Capital
This is the very first investment of money that is used to start a business, be it for research or development of the prototype of the product or simply the funding that will help you to focus on your project before you take it up full time.
This is also where you use your own capital, or take help of F&F, that is family and friends.
You can even take help from ‘fools’ who are ready to take a risk on you and your business and provide you with the initial capital as a loan or few who even give you the money as goodwill.
2) Angel Funding
Once you have raised as much as you can from the FFF (Friends, Family, and Fools) you should start looking for Angel Investors.
No matter how generous your family and friends are, those finances are limited and the majority of the time, not even enough to help you reach your dreams.
We call these investors ‘angel investors’ as these are those people who are wealthy and outside the initial group of your family and friends.
Yet they are still ready to take a risk on your business as a loan or in exchange of some stocks in your business.
Please note, that these angel investors can be part of your friends and family itself and you might find them during your seed money search itself.
3) Venture Capital (Series A, Series B, Series C, etc.)
Venture Capital or VC comes into the picture when you have already launched your business and have started with the distribution or sales.
While the seed and investor money helps you launch, they are are not bringing you anything in return as you are just spending at that stage and not earning anything in return.
At this stage, you should approach a venture capital or VC for funding so as to grow your company and to finally move towards making a profit.
Note that if the company is not making any profit at the time of approaching the VC, the capital they get is often used to offset the negative cash flow that they are facing.
There are multiple rounds of Venture Capital financing with each round typically given a letter like A followed by B followed by C, etc.
Startups that approach VC have at that point usually figured out what their product is, what is the size of the market and to what scale to they need capital.
These startups are approaching venture capitalists to either improve their distribution systems or to further establish a business model if they don’t already have one.
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How did Venture Capital financing work?
Different VC rounds or series, that is A, B or C, reflects different valuations of the company and where they stand.
For example, a company that is prospering falls in Series B and those who fall in Series C will be those companies who will have a higher stock price than their previous evaluation.
Please note if a company is not prospering, they can still get to subsequent series or rounds of financing, but their valuation will be lower than the previous round and they will be in a “down round.”
Each round may also include ‘strategic investors’ or investors who participate in the round and also offer value such as marketing or technology assistance instead of money
In each round or series money is typically received in exchange for preferred stock (as opposed to the common stock that seed capital sources or angel investors receive).
According to the data collected by Oysterconnect in the past few years, while angel investor funding has been on the rise (nearly 23% of fundings coming from angel investors), startups still rely on VCs for the majority of the funding. Nearly 28% of funds being provided by Series A venture capitalists and 18% from Series B.
Some known startups to come out in recent past to take help Venture Capitalists are Droom in the automobile industry (funding of US $30,00,000 in Series E).
Mobile Premier League in the gaming industry with the funding of US $5,00,000 in Series A and Urban Clap in the service industry with funding of US $50,000,000 in Series D.
4) Mezzanine Financing and Bridge Loans
Once the company has progressed and are much more profitable than when they approached VCs for funding.
The reason they are looking for bridge loans or mezzanine financing is that they may be eyeing an IPO opportunity or are looking at an acquisition and need more funds or are planning a management buyout and require additional funds.
They thus tap into mezzanine financing or bridge financing for extra funds and help.
These mezzanine finances are often used six to 12 months before an IPO and once an IPO is acquired they use the IPOs proceeds to pay back the mezzanine financing investors.
5) IPO (Initial Public Offering)
Though we briefly mentioned IPO above, let us explain what they are.
IPO stands for Initial Public Offering and is used by the company who have finally reached the stage where they can raise money by selling their stocks to the public.
The IPO’s opening stock price is typically set with the help of investment bankers and financiers who commit to selling X number of the company’s shares at Y price so as to raise money for the company.
Once the company stock is out for IPO, it is traded through a stock exchange like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India.
As a company still looking for initial startup funding stages, you might think that Venture Capitals and IPOs are too far away, but they are not.
According to yourstory.com, in 2017 alone a total of $13.7 billion were invested across 820 deals in India.
Further, the value of investments in 2017 was significantly higher than in 2016 and 2015 when funding was at $4.06 billion and $8.4 billion respectively.
With these startup funding stages, hopefully, you’d be in a great position to elevate your business to great levels. Let us know in the comments below if this helped you.
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