Introduction
Startups have been around for a long time; however, the rapid technological advancements have given a significant boost to the startup culture. With more and more people opting to set up a startup the fight for funding has become intense. 82% of businesses failed in 2023 due to the lack of cash flow thus finding a reliable source of funds becomes essential for a business’s survival and success.
A business can obtain funding through various sources and at various stages of its life. With this blog, we wish to explain all stages of fundraising ranging from pre-seed funding to IPO.
So, let’s get started……
Startup Funding Rounds
Finance is the fuel that helps propel a business on its journey. 16% of startups fail due to lack of funding thus, it is crucial to have the right funding at the right time.
A startup will in all likelihood go through the following rounds of funding to reach success.
Pre-seed funding round:
Do you have a brilliant business idea that has the potential to perform well in the market but not the funds required to get started on your entrepreneurial journey? Well, then funding is what you need.
At the very onset of your entrepreneurial journey, it is crucial to find a reliable source to fund your business idea. At this nascent stage entrepreneurs generally rely on bootstrapping to fund their business. The funds received from their personal savings, family, and friends are usually used to kickstart the business venture. At this stage, the main focus is on developing the business idea into a viable business by conceptualization and market research.
All the resources are at this point concentrated on ideation, recognizing the target market, and creating a thorough understanding of the problems that the idea seeks to solve.
A clear value proposition along with a prototype or MVP (Minimum Viable Product) can go a long way in showcasing your vision and inducing your family and friends and in some cases even angel investors to believe in the potential of your idea and invest in your business.
Seed funding round:
As is clear from the name it is the funding that plants the seeds for a startup’s growth. This is the first stage of the funding journey where the investors are provided equity in return for their investment. Generally, the equity given to the investors at this stage is between 15%-35%. Of the total equity.
The funds raised at this stage are mainly used for scaling the business, finding the product-market fit, and refining the business model and prototype or MVP created in the pre-seed funding stage. A startup at this stage will have to focus on showing significant progress in its business plans, revenues, and other business aspects to attract the attention of investors.
Funding at this stage is usually quite low and is usually just sufficient to cover basic business costs like employee salary, rent, and R&D expenses. The average funding received by businesses at this stage is about $3.6 million. At this stage, funding is usually provided by Angel investors and Venture Capitalists.
Startups at this point must focus on gaining market validation for their business idea or product and divert their attention towards building up a strong and dependable team and creating an active customer base.
Series A funding round:
You have created a business that is scalable, and you are now looking for funding. Well great work because your business has beaten the odds and risen above 60% of your peers who failed to last till the Series A funding round.
To secure funding at this stage, the businesses must have a business model and scalability plan readily available. Consistently growing revenue, expanding customer base, and a clear vision for the future of the business can go a long way in attracting Series A investors.
Even though Angel investors continue investing at this funding stage, the main investors are the Venture Capitalists. To improve your chances of receiving Series A funding approach institutional investors and Venture Capitalists specializing in Series A investment with a well-thought-out go-to-market (GTM) strategy to bring your product or service to the market.
On average the funding at this stage is around 10 million dollars with a company valuation of 10-30 million dollars. Many startups fail at this stage as it may be difficult to find investors who are willing to trust the future projections shown by startups.
Using the funding raised through Series A funding round you can undertake activities that help actualize your business plans. The main focus at this point is usually on product development, marketing, and branding activities.
Series B funding round:
Having secured and utilized the Series A funding for the growth of your business, the next step in the funding journey of a startup is to find investors willing to invest in and accelerate the startup’s growth. Though your business at this stage is capable of generating steady revenue it needs support to expand its operations. To become successful startups, need to identify ways to expand their business and market reach.
To attract investors startups at this stage, have to demonstrate their ability to achieve scalable growth, attain substantial market penetration, and have clear revenue pathways. Funding at this stage can be expected to be anywhere between 15-25 million dollars with a company valuation of approximately 25-60 million dollars. Series B funding can be raised through Venture Capitalists focusing on series B and later-stage funding, or by tapping into existing investors for additional support.
The investment received at this stage is utilized in scaling operations and solidifying market hold to help in business expansion. Startups can undertake activities like hiring experts in the field of marketing and strategizing and reach out to customers in new markets or target existing customers with new products. To achieve exponential growth startups can also use the funding to take over competitor or complementary businesses.
Series C funding round:
Series C funding round often considered the closing round is the round that gives a final boost to a business before it goes public with an IPO (Initial Public Offer). If your startup has reached this funding round you are one of the very few startups that have managed to survive and convince investors of the viability of your business.
Businesses at this funding stage are already quite successful and are looking to push the company to the next level of maturity by using the funds to develop new products, expand into new markets, or even acquire other companies.
With an average valuation of $100M to $250M and average funding of around $50 million, this funding round attracts hedge funds, investment banks, and private equity firms as it has low risk and is likely to give higher returns. Though investors from previous funding rounds can also invest in this round their contributions are significantly lower as the fund requirement in this round is much higher than in previous rounds.
This funding round lays out the groundwork for optimizing business operations to enable expansion at a global level while working on creating exit strategies for investors.
Series D and further funding rounds:
As stated earlier generally funding rounds go up to the series C round before opting for an IPO or sale. However, under some exceptional circumstances, the funding rounds can extend to Series D and beyond, this extension is not inherently bad but carries both negative and positive connotations. For instance, the need for additional funds could be because of a new opportunity for expansion or it could be because the startup has failed to meet the expectations it set out for itself in the previous funding round.
It is due to this reason that acquiring funding at this stage may be more complex than during previous rounds. Many startups may also have to resort to raising funds at a lower valuation than the previous round thus gaining the name “down round”. The down round devalues the stock making it difficult for startups to raise the stock value and withstand competition.
IPO or acquisition:
This is the ultimate goal of any startup. An IPO or the acquisition of a startup by a leader in the field acts as an exit strategy for investors who have invested in the business. An IPO allows the business to offer its shares to the general public. The owners of the startup and its initial investors can use this opportunity to offer their shares to the general public and receive handsome returns on their initial investments.
A successful IPO or acquisition of a startup is a valid proof of its success. This is the point of the successful culmination of your startup journey.
Conclusion
Startup funding is a dynamic field with challenges and opportunities at every nook and corner. For businesses striving to be among the 10% of startups that succeed it is important to have an in-depth understanding of your business’s funding needs and create the best possible strategies to ensure the availability of the right amount of funds at the right juncture of your startup journey.
If you enjoyed reading this blog and are interested in knowing more about startups and the factors influencing their success, consider reading our other blogs.
