Entrepreneurship Industry News

The Stages of Startup Funding

It’s relatively easy to have a great idea for a startup business. However, once you have that great idea, it is quite a bit more complicated to bring it through the stages of startup funding to fruition.

Launching a business requires much more than a great idea – it requires discipline, time, dedication, and perhaps most of all, money. And despite the way that the term “angel investor” gets thrown around, it is pretty unlikely that you’re going to just get a major windfall of cash from a generous individual who’s just dying to back your somewhat nebulous idea.

It’s more likely you’ll need to go through the three major stages of growing a business through funds of a variety of sources. Startup funding and corresponding valuation at each stage is typically based on several elements, including the track record of the founder(s) and management team, potential market size, and overall risk.

So it’s time to get real about where you’re actually going to get funding for your startup from, and how you’re going to get it.

Start By Getting Real

Venture capitalists almost never buy into businesses at the idea stage – that’s just not how startup funding works. So get the concept that you’ll be the 0.01% out of your head, and join the 99.9% of start-up companies and realize that you’ll have to begin the development with your own funds, investments from friends and family, accelerators, and crowdfunding, and perhaps an angel investor if you’re really lucky.

This is the pre-seed stage, when you’re fleshing out your initial ideas, doing research, and perhaps testing your ideas and preliminary hypotheses during the three main stages or startup funding rounds.

The Pre-Seed Stage

This could be considered the true bootstrapping stage, when you create and launch your product. Most, if not all of your business funding will be drawn from your own funds during this stage, or those of friends and family.

The pre-seed stage of startup funding could also be referred to as the research phase, or when you assess the viability of an idea, see if anyone has done anything similar before, determine what it might cost, formulate a business model, and generally where to get started growing your seed of an idea into a business.

Refinement and (re)alignment should also occur during this phase, since having a relatively small sample size or focus group of customers means that you can easily test, analyze, and make changes or pivot if necessary. After all, many popular apps and companies are in perpetual beta, so don’t fool yourself into thinking that your idea is perfect right out of the gate. Rather, make adjustments as needed and avoid the “Valley of Death” where perfectly good concepts lie fallow due to lack of funding.

This part of the startup funding process is also where you begin to build your personal council or board of advisors, whether they become official at some point during the process or stay closely involved as a friend or mentor.

On that note, keep in mind that other startup founders and business owners can be some of your most valuable allies during this stage, since they’ve not only been there before, they (and therefore you) have hopefully learned from their mistakes and can offer you tips and advice that’s already been tested, so to speak.

The pre-seed stage is also the time when you should work out any necessary partnership agreements, copyrights, and other legalities, since any problems in that realm are best solved early before they become expensive and even insurmountable, since no one is going to invest in a company with legal issues prior to launch.

During the pre-seed stage, you’ll need to focus on these getting these two steps completed.

  • Plant Your Seed

    Any and all early stage venture capitalists and similar types of investors are likely going to want to see some examples, prototypes, mock-ups, plans, or specs for your business and its product(s), as well as proof of concept in the form of early users and/or customers. And there’s no way to get all that done without rolling up your sleeves and doing some work.

    This might be both the most difficult and the most rewarding part of entrepreneurship. After all, the thrill of making something that existed only in your brain become a real tangible thing can be downright addictive.

  • Ground Your Concept In Reality

    Potential VC’s or angel investors will also require the aforementioned proof of concept. They need to see that people actually want to buy into your idea, use your app, or otherwise engage with your company in a way that could lead to profits – or who knows, it could change the world.

    Furthermore, they’ll want to understand your company’s unit economics, or the revenue and cost associated with a given business model on a per-unit or per-product basis.

    Gaining more traction and an ever-growing audience share of how funding works in general, and that will prove to be a general theme throughout the process. It’s unlikely that venture capitalists or angel investors will choose to prop up a stagnant business (unless your idea really is that good, but it is best to be somewhat realistic here), so showing constant, steady, continued growth is necessary throughout the startup funding stages.

The Seed Stage

Not to be confused with the pre-seed stage, this is when you have a product or service, some traction amongst your desired demographic, and you’ve worked out a few of the kinks and settled on the basic direction for your business. Although the idea is still immature, you’ve got a name, a brand, and the beginnings of a personality, but most of your funding still comes via bootstrapping or the generosity of family, friends, and perhaps some crowdfunding, incubator, or accelerator money.

During this stage, you should be focusing on orienting your company in the broader marketplace and developing a deeper understanding of your users and what resonates with them.

This focus on achieving a product-market fit is an essential part of funding a business, as well as building it overall (after all, it’s not all about the money – you want to make users happy as well, since happy users invest in products and services that they like).

Developing further and deeper traction in your target market(s) is also a key part of this stage in the startup funding process. In fact, while this is an ongoing aspect of developing and funding a company, these first exciting bursts of growth and traction are perhaps the most important, since they’ll prove the viability of your idea and products at the outset.

The seed stage is also the time when you should find any necessary partners such as development companies, designers or creative agencies, and potentially public relations and market research firms. Any advertising you engage in should be on the grassroots level – let your influencers and early adopters spread the word via social media, referrals, beta invites, free trials, and other methods of generating buzz.

Series A

This is the stage that most people think of when they visualize how startup funding works. Your seedling of an idea is off the ground and beginning to resemble a viable business.

During the Series A period, you’re working with venture capitalists and angel investors to further refine and improve your original concepts, growing your team, finding partners, and decreasing your burn rate and establish solid unit economic principles. Basically, now is the time to set yourself up for future growth and success.

It’s also time to start scaling up in earnest. Your idea should be gaining traction at this point, and at least a little bit of buzz in the tech or business press and amongst the key influencers for the target audience. This is also the time to optimize your business, offset any financial shortfalls, correct any mistakes you’ve made along the way, and begin approaching new markets and demographics.

You should be getting some name recognition amongst your main target audience and starting to extend your brand’s reach beyond the initial groups that you approached, and perhaps you are being covered by the various publications that focus on the startup scene.

This is also when the early adopters or your core group of influencers begin to discover and spread the word about your company. Any advertising that you engage in during this stage is most likely fairly targeted, since your main goal should be improving your product and position in the market.

The goal of the Series A stage, or the beginning of stage 2, is to position your company for future growth, get all your ducks in a row, and be prepared for expansion in the next stages.

Series B

At this point, your company and product(s) should be fairly well established, and you should be focusing on expanding both internally by growing your team and externally by growing globally and potentially acquiring complementary or competing companies and/or technology.

During the Series B stage of the startup funding process, you should be getting more mentions and buzz from the press as well as growing your foundation of influencers, adding new members to your team, finding partners for PR, development, design, etc. as necessary. In fact, the amount of business funding that you secure during this stage might be the most important, since talented, motivated, and highly skilled people tend to be expensive.
Series C, D, and E (and so on…)

This is the time for continued growth in every way, shape, and form. New acquisitions, expansion to new parts of the world, and increases in funding from established sources like investment banks, private equity firms, and larger venture capital companies are all potential parts of the end of the second stage, when your startup should be reaching the ten million dollar mark in regard to its value.

Now that you’ve determined where the profits are, it is time to win over the market with further improvements as well as to launch broader advertising campaigns with a more extensive reach. Consider branching out into new regions, accessing new demographics or industries, or even acquiring the competition, especially if they possess technology, talent, and share of audience that could potentially speed up your startup’s journey from seedling to fully grown tree.

Bridge Loans & Mezzanine Financing

This is when a relatively mature business gets over the proverbial hump with a “bridge” loan or mezzanine financing before an IPO, acquiring a major competitor(s), or even a management buyout by a larger firm or competitor. Remember that there is more than one way to make a graceful exit and sometimes you are best served by accepting a buyout and moving onto your next startup.

These types of loans last six to twelve months and are typically paid back by funds raised during an IPO, since they serve to bridge the gap between the end of stage 2 and the point of a business reaching maturity. At this point, a startup (if it can still be considered a startup company once it has reached this stage) is typically worth at least $100 million.

IPO

Ah, the promised land. Once a company has reached the stage of an IPO or initial public offering, most of the roads have been crossed, at least in regard to making some facsimile or version of the original idea a reality thanks to your various sources of funding, your board of advisors (official and unofficial), your team, your partners, your early adopters and influencers, and your customers.

This is when you’re ready to become a publicly traded company, have been valued at over $100 million, and are getting to the point where your brand might be a household or at least commonly recognized name in your vertical or niche.

Once your company is listed on one of the international stock exchanges, it is time to celebrate and join the public market, and even consider launching more products, approaching secondary markets, and/or expanding to new regions of the world. And while it’s not technically part of the process, we highly suggest you thank everyone who believed in your idea at this point!

This is the end of the road, at least for many entrepreneurs – once you’ve taken the company public, it is time to make (hopefully) graceful exit and go on to the next one, or retire or become an angel investor yourself. After all the work that goes into creating and funding a startup, you’ve certainly earned the right to relax and/or advise others as to how to grow their startup and make it profitable.

However, this final stage in the startup process is also when a company is deemed to have matured and be successful – to continue the plant-based metaphor, your seed is now a full grown tree.

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