You’ve planted the seed of a startup and mapped out your product development plan. But it all depends on whether you have the funds to launch it from the ground up and bring it to life. Therefore, nearly all companies need to undergo several startup funding rounds, which require external funding or venture capitalists to cut them a cheque.
The Different Startup Funding Rounds
Each startup funding round, from pre-seed to IPO, is a milestone in the startup’s growth cycle. Let’s see how a spark of an idea can give birth to a thriving startup.
Bootstrapped Stage
For a bootstrapped company, the very first startup funding round depends on the founders and their own resources (such as personal debt or savings accounts). However, with the advent of cloud, no-code, and online distribution, many startups try to push the initial few funding rounds to retain more equity. In fact, these factors add value to the startup’s growth to the extent that founders willingly extend their bootstrapping stage, hoping to chance upon a major payday offering when they open their companies to external investors.
Therefore, startup funding rounds are an integral part of their growth journey.
Pre-seeding Stage
But in reality, not every company can bootstrap their way to success. More often than not, budding startups need external or angel investors’ support to scale and grow, bringing us to the pre-seed funding stage. With an experienced founding team at the helm, startups at this stage are still building their minimum viable product (MVP), garnering a small user base, and fine-tuning their business idea. A successful previous entrepreneurial venture only makes it easier to raise pre-seed funding. However, to bet a significant amount of money on a nascent idea can be tricky.
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- Pre-seed investors – This is the earliest stage of a startup seeking external funding from the people around them, that is, their families and friends or through crowdfunding, incubators, or accelerators. Having strategic investors on the pre-seed cap table can set a precedent for the upcoming seeding rounds.
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- Pre-seed valuation – A billion-dollar idea or not, pre-seed startups get modest small checks in this round of valuation, ranging from $10k to $1 million. These funds are often used to set up an office, market research and testing, or to prepare for the product launch.
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Valuing a company this early can be challenging. Hence, founders swear by the SAFE notes – Simple Agreement for Future Equity. This financial instrument allows investors to provide capital so the startup can grow faster in exchange for future equity in the company.
What is a seed round?
We are entering the startup funding round where the seed of your idea can germinate into a tree with capital support from investors. Once you have entered this official fundraising stage, your MVP should be a proven product-market fit (PMF). Factors that determine your startup’s success include its monthly revenue growth, traction, sign-ups, burn rate, meaningful product usage and whether it has any actual demand in the market.
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- Seed investors – Angel investors and early-stage venture capital firms are more likely to invest in this round, with a higher likelihood of securing the first board seat. This translates into more influence and voting rights in paramount decisions. It also gives them pro rata rights to invest in the following funding rounds.
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- Seed valuation – Startups looking for seed funding have an estimated business value of $3 million to $6 million.
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The seed stage is a crucial landmark that determines your startup’s potential.
1. Series A Funding
Congratulations! You’ve made it to the big leagues. Now is your time to scale up, but with the help of a significant investment, to catapult your startup to success. Series A funding scrutinizes the startup’s growth, track record, gross margins, and YOY revenue flow.
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- Series A investors – To capitalize on this momentum, seasoned venture capitalists are the top investors in this Series. So, when you are in the pitching process, lay out a quantifiable growth plan, and explain how their investments will help your startup reach its goals.
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- Series A valuation – Valuations under this Series type vary between $10 million and $30 million.
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This funding round aims to scale the business. It also helps purchase equipment and inventory. Additionally, it supports expansion into new markets, building a core team, and working towards long-term goals.
2. Series B Funding
Companies seeking Series B funding indicate that they have established a strong market presence. This part of the entrepreneurial journey includes having stable revenue, a solid customer base, and hitting all your KPIs. It also involves surviving investor pressure. If you’ve achieved all this, it means you’ve done everything right. Series B funding type would enable startups to expand their operations, increase their market share, and tap into new markets.
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- Series B investors – This late-stage funding comes from hedge funds, investment banks, venture capital funds, private equity firms, or investors who initially offered Series A funding.
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- Series B valuation – The valuation for Series B startups varies from $30 to $50 million.
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As a Series B funding, your startup now has more negotiating power because it has proven to be successful. Now, the company is at the cusp of expanding internationally.
3. Series C Funding
Proceeding to Series C funding is a reflection of your company as a proven and successful business model. You are a key player in your industry with multiple revenue streams. You also have a diverse revenue model, a dominant market presence, and a significant market share.
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- Series C investors – Hedge funds, investment banks, late-stage venture capitalists, and private equity firms, attracted by the company’s maturity and growth prospects, are more likely to invest.
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- Series C valuation – Series C funding amount is generally between $50 and $100 million or more.
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After Series C, your company generates enough revenue to sustain its own growth without depending on external funding. This funding type is the final step in terms of venture capitalist financing. You can go on to make strategic acquisitions to expand your product portfolio. This also helps prepare for a potential exit through an initial public offering (IPO).
4. Series D Funding
Series D funding is raised if the company is too ambitious and wants to hit it out of the park. Alternatively, it may be raised because the company was unable to meet its goals and raise adequate funds in Series C. Less than 5% of startups raise a Series D round, and even fewer move to Series E, F, or G.
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- Series D investors – Investment bankers or private equity firms are primarily involved. They provide capital and expertise to prepare for IPOs, acquisitions or mergers.
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- Series D valuation – The valuation ranges from $100 million to billions.
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Not all startup funding rounds extend till Series D, as some prefer to exit through IPOs or an acquisition.
Initial Public Offering (IPO)
IPOs are the ultimate milestone for any startup. An IPO is when a private company lists its shares on a public stock exchange platform, allowing public investors to buy and own a piece of the company. Marking a transition from a high-growth startup to a publicly traded enterprise, this is a key moment. It’s the moment for founders to cash out.
By going public, companies can raise substantial capital from a broad base of investors. This also provides liquidity for the founders and investors.
Final Thoughts On Startup Funding Rounds
Before approaching potential investors, you have to bring your A game. This means having a strong business plan that outlines your goals and products or services. It also requires a robust financial model. Additionally, you need a meticulous pitch presentation. This presentation should communicate your unique selling proposition, fundraising requirements, and financial objectives.
Startup funding rounds are not just a game of numbers; they speak volumes about a company’s vision and the determination to make it big. So, whether you are just starting out as a founder or an aspiring investor, your journey from pre-seed to IPO isn’t just about money – it’s about momentum.
