What Are The Funding Stages For Startups?

The current age is for startups and ideas. You can see various startups in many domains. Every other day, you can hear news about a new startup launch. But have you given a thought about how these startups function? To run any business, you need investment. The investment can either come from your own resources or from other investors. So, what are the funding stages for startups? In this article, I will explain the startup funding stages.

Source: ActualSimple.com

What Are The Funding Stages For Startups

1. Pre-Seed Funding

This is the first stage in the funding stages. This is when mostly family, friends, or other investors invest in your idea. You can think of this as the early stage of funding. You don’t have the product or the service ready yet. You may only have the prototype. This is when you get your funding. People usually fund businesses at this stage in exchange for equity. It is like they are not investing in something already in the market. Their investment will be used to develop the product or the service and its launching.

When Can You Think Of A Pre-Seed Funding Stage

A. Developed Prototype

You are ready with the prototype of your product or service. The final product is not supposed to be ready. However, you should be ready with the basic product structure and features.

B. Established Market Research

When you have done your market research for the initial development of the product, you can apply for pre-seed funding. This is also important as this research will help you present how your prototype is promising for becoming a great product.

C. Established Founding Team

Before you try to get pre-seed funding, you should be ready with the founding members of your startup. This will put confidence in the investors to invest in your idea. No investor would invest without seeing a founding team full of experts in that domain.

2. Seed Funding

This is the stage where you have launched your product or service in the market. You are currently serving some customers and are active in the market. You have gone beyond the prototype stage and are available to cater to the needs of your customers. At this stage, you may need funds to improve the product, do more market research, or start promotions and marketing.

The investors would usually check all the reports and the current status of your product or service. They would want to know how your product is performing in the current market. You may also need to pan out the entire strategy to compete against competitors. The investors would want equity in return for their funding.

Many businesses do not approach investors and rather rely on crowdfunding for their business. Or they bootstrap and put certain profits on a timely basis for their future costs.

3. Series A Funding

Now, Series A Funding is also putting more money into your business, right? But how it is then different from pre-seed funding or the seed funding stage?

The difference lies in the amount of money raised and the source of the funding. The Series A funding would typically range in millions whereas the pre-seed funding and seed funding is below millions. Moreover, the series A funding would come from equity firms handling multi-million dollar investments across different startups. The funding comes from venture capitalists as well. On the contrary, in pre-seed funding and the seed funding stages, the funds are raised from family, friends, or the founding team itself.

The funding raised during this stage is mainly planned to expand the currently running business. It would include acquiring more customer base, hiring more employees, getting new office space, or even paying the amounts raised in the first two stages.

4. Series B Funding

This funding stage is similar to the series A funding stage but with slight differences. The series B funding includes the investment by investors primarily in equity-based deals. The investors would invest in a particular business in exchange for preferred shares of that company. You can expect new investors for this stage along with previous ones. Many investors who are associated with a company from the previous stages of funding may want to continue their business. Hence, they do invest more in further funding stages as well.

Most of the companies trying to raise funds from series B funding are doing well in the market. This is obvious from the reason that they already passed the previous three stages of funding. These companies have created a pretty good and decent start to their business model. They are running in profits along with serving a strong customer base. In general, you can say that the evaluation of companies in series B funding is more than $10 million.

5. Series C Funding

Series C funding primarily focuses on when the business needs to expand their operations globally. It would include raising capital that would assist them to target the global audience. This would also include acquiring other businesses to help expand the operations with less competition.

Companies participating in series C funding are quite successful in their operations. They are already in the top leading names of their domain. Series C funding would help them upscale the entire business globally.

Investment banks, hedge firms, and private equity firms participate in series C funding. This is because the companies at this stage have proven their names through their profits.

6. Series D Funding

There are few companies that go beyond the series C funding round. The main reason is that most of the companies are well equipped with the capital raised. However, in some cases, there may be uncertainty in the business. This is where the company may decide to raise some more capital before things take turn for the worse. This is where series D funding comes into play.

Series D funding is primarily aimed at companies looking to fix certain things at hand. This can be a new competitor in the market. Or maybe a new and unique product idea out of the blue. Moreover, there is no limit to the number of funding rounds a company wants to participate in. It would depend on the company’s goals and the capital required.

7. Mezzanine Funding And Bridge Loans

Bridge loans are usually short-term loans that the company can use to fund its expenses. If the company is looking for a loan with a long-term goal, the bridge loan may not be a good option. The loan is provided against collateral such as property or inventory.

Mezzanine funding is also a short-term financing tool for companies. It is a mix of debt and equity financing. Now, how it is different from a bridge loan?

In Mezzanine funding, there is no collateral against which a loan is approved. Instead, as a lender, you have the right to convert your debt into equity interest. This is usually done after the venture capitalists and other senior leaders are paid.

This phase of funding usually aims to bridge the gap between the company’s current value to its stage of releasing its IPO.

8. IPO

This is probably the final stage and method of raising further funds for your company. This is when the company opens the shares to be bought by the general public. It stands for Initial Public Offering. This is when you can purchase the shares and invest in the company as an individual.

This is considered a successful and major step in the business. The business finally goes public. It is now raising funds through the public, allowing them to earn as well. In this phase, many new entities join the company. You will see public offering teams are involved with financial experts. The entire team audit the company finances along with fulfilling the government requirements before going public.

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