5 Stages of Startup Funding – Explained

Every Startup needs funds, regardless of the current status or situation prevailing now in the company. There are fives stages of startup funding available for your growth process.

You may be the new entrepreneur having a startup idea looking for funding to develop the new product. Or you might be running a startup that seeks to raise funds to expand your brand or even for Initial Public Offering.

Before reaching the investors you must know the types of funding for startups, startup financing cycle, and startup funding stages that are available. This helps you to understand clearly about whom you will get funds and at what stage you can reach out to them.

The startup funding works at the different stages, relatively to the purpose and needs of your business. Right from the pre-seed funding to IPO, you could reach different types of investors as per the requirements of the company.

In this article, we can explore the 5 stages of startup funding in detail.

Let’s check out…

Stages of Startup Funding

stages of startup funding

Pre-Seed Funding

At the nascent stage of Startup Company, founders look for fund to develop a product, after validating their startup idea.

What is Pre-Seed Funding?

Pre-seed funding is the initial round of funding from friends and family to start the operations in a startup company. Pre-seed funding is also called Bootstrapping that comes under early-stage financing.

It is an unconventional way of getting funds from the investors before reaching the institutional Venture Capitalists or Angel investors. It is said so because this type of funding is very less in amount and that would be useful to meet the basic necessities to build a startup company.

The amount of money ranges from 5 to 15% of the investment according to the type of business you do.

The pre-seed fund is considered crucial for your business, as it takes your firm to the next level. Like you pass the first test. Only then, you could determine your business to be in the further stages and helps you to get funds without fail.

What you have to check before approaching the investor is your idea.

  • Do you have a great idea?
  • Does it provide a solution to the problem?
  • Does it provide value to the customer?
  • Is that your business model scalable and profitable?

To justify the above question, you must have proof of concept or prototype that supports your successful model. This creates interest and belief in the investors, whom you approach to get the fund.

After getting this pre-seed fund, it supports and drives you to relentlessly work on creating a Minimum Viable Product (MVP). Also, it helps to hire a CTO and build a strong team for your startup company.

Where to get a Pre-seed fund?

The Potential Investors for Pre-Seed Funding are

  • Friends
  • Family
  • Micro VCs
  • Fund from your credit card

Seed Funding Or Angel Funding

Seed funding is early-stage funding obtained to develop a product that satisfies the product-market fit. Seed funding is also known as seed financing or seed money.

Seed financing can be obtained from many options like Angel Investors, Banks, and crowdfunding for an equity stake or Convertible note.

There are several crowdfunding methods available for startups. You have to critically analyze and choose the most suitable for your firm’s growth.

Some of the crowdfunding platforms you could consider are

  • Kickstarter
  • Indiegogo
  • StartEngine
  • GoFundMe
  • CircleUp
  • Patreon
  • LendingClub

Accessibility to seed money from these investors is not easy as you think. Even many startups fail at the early stage itself, because of improper money management and end up without getting any funds from the investors.

To stand off the ground and to get funds from the potential investors you must apply some tactical method, which is quite demanding before reaching the investors.

Keep in mind that these funds are acquired without showing any revenue data or growth metrics. Therefore you need to attract and make them invest in your company.

For this purpose, you will have to present a pitch deck to the investors. This shows

  • How well you have done the Market Research
  • Your entire Business plan
  • Challenges, and opportunities.

Thus, it ensures that you will solve the problem in the market and they believe you could gain a competitive advantage.

The money you get from the seed fund would be used for some essential things like buying office equipment, infrastructure development, and payroll activities. The ultimate purpose you have to accomplish is launching a complete product.

Venture Capital Funding Or Series (Series A, B, C) Funding

Venture Capital funding is a type of equity funding that is acquired by a startup company that shows high growth potential. Venture capital funds are obtained after starting the business operations, by then earns a good return as a profit.

Venture capital funding is also known as series funding.

Out of the five stages of startup funding, VC funding is important and different types of venture capital funding available for startups according to their growth stage and the status of their entity. Yet, research tells that only 0.05% of startups raise venture capital.

Obviously, it is that hard to get funded from VCs. The crucial thing to get funds is that your product should be disruptively innovative and viable for market conditions in many aspects. So that VCs show interest in investing.

Once if you attain the eligibility to get funds from VCs, you could possibly get further rounds of fund without many efforts and there are many added advantages in getting so.

One such advantage is, you will gain knowledge by working with industry experts. They will guide you in business management, especially in making decisions in investments, buyout, etc…

Venture capital fund is used for business expansion. For example, creating a new business channel in different locations, acquiring new customers, and further development of the product.

Venture capital funds are provided with different series of rounds like Series A, Series B, and further.

Mezzanine Or Bridge Funding

Mezzanine funding is known as bridge funding obtained from the investors, without selling a large stake of the company.

It is a hybrid method of equity and debt. Because the investors lend money at a high rate of interest, i.e. from 12 to 20%. But in case if the borrower fails to pay back the money, the investor can convert the debt interest into equity.

After getting all the series of funding, mezzanine funding would be useful for

  • Management buyout
  • Acquisition of new company or part of the company
  • To work on a specific project that is completely new
  • To develop an additional product to the market 
  • To expand the business in several aspects

Mezzanine funding supports the company in long-term growth with no amortization of principal amount. But the only disadvantage is the high interest rate and equity conversion, for loan default. It is most suitable for well-established businesses to expand the market, than for small businesses and startups.

Initial Public Offering (IPO)

Initial Public Offering is the first time the private shares of the company comes to the public.

The Public invests in the company by trading and gets their shares. After a certain period of time, they sell the shares and earns a profit.

Private shares from the shareholders like co-founder and partners comes to the public at this stage. The founder needs to hold more shares or otherwise he/she may lose control over the management activities.

The startup company that looks for public offering must have good financial stability and track records with high returns for more than years. IPO is more appropriate for the startup company that has an exit plan and exit strategy. It is the final method in the stages of startup funding.

The big advantage of IPO is the company gets more funds from the public, this helps in the Acquisition, and Merger of small companies. When you get additional funds from the public, you can expand the business, hire more employees to work efficiently. This will further yield a high return as profit.

  • Eventually, there are some risks associated with IPO. As the shares go to the public, it would be vague for the owners on how the company will perform after the public offering.
  • To manage the risks, the firm must have a strong team to work and the management has to meet some legal policies and regulations fixed by the respective government.

The company can approach one or more investment bankers who are specialized in determining the value of securities. Investment bankers are known as underwriter who deals in buying and selling the securities and fix the stock price before issuing IPO.

Reader’s Insight

Let us know if we missed out on anything in this article stages of startup funding and share your thoughts in the comment section.

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