Building a startup is challenging, with costs varying by businesses. Entrepreneurs need capital to develop the products, market the products, purchase necessary software, support daily operational expenses, and hire team members. Insufficient capital stands in the way of their business ideas becoming reality. Thus, startup founders will raise funds to start and grow their businesses.
There are different startup funding stages, where each has a different purpose and attracts different groups of potential investors. Gaining insight into the characteristics of each stage and the investment criteria sought by investors can assist startup founders in preparing for different funding rounds. Here, we will go through different funding stages from the pre-seed round to the IPO.
The pre-seed stage is the first startup funding stage. The startup founders need to think thoughtfully about their business concept, assess the business model, estimate its costs and profitability, and create a solid business plan. It is also important to understand the target audiences, markets, and competitors. Some business frameworks can provide a systematic approach to help startup founders create a solid business plan. These frameworks include Porter's five forces, the STP marketing model, the 4Ps of the marketing mix, SWOT analysis, and PESTEL analysis. Some startup founders may build a prototype of their product to demonstrate its feasibility, gather early feedback, and attract potential investors or partners.
As the pre-seed stage is an idea stage, the potential risks and failure rate are very high. Therefore, most of the funding comes from bootstrapping, family, and friends. However, other funding sources include pitch competitions, angel investors, accelerators, incubators, syndicates, crowdfunding, and bank loans. The startup founders will use the funds to build a minimum viable product (MVP).
After the pre-seed stage, it is the seed stage. For this stage, it is important to be able to show potential investors how your business idea can become a successful business. Thus, the startup founders will need to have an MVP and a trustworthy team ready. The MVP can help the founders do a product demonstration to attract potential investors and conduct beta testing to gather some user feedback. On the other hand, recruiting a team of skilled and experienced members is critical in gaining potential investors’ trust and letting them believe that your team can make the business successful.
For the seed stage, the investors can be angel investors, accelerators, venture capital firms, syndicates, and crowdfunding. To prepare for fundraising from these investors, the startup founders need to have a well-designed pitch deck. The fund will be used for product launch, marketing, and improvement.
The third fundraising stage is the Series A stage. To attract potential investors, the startup founders will need to demonstrate some achievements that have been made by showing extraordinary metrics and traction. For example, increasing month-over-month (MoM) growth, high conversion from free users to paid users, low churn rate, increasing DAU/MAU, etc. Thus, the startup founders will concentrate on marketing the product and acquiring customers.
It is much more difficult to raise Series A funding as compared to the pre-seed and seed stages. The founders need to convince investors, such as venture capital firms and institutional investors that their startup has the potential to be a good investment for them. The funds raised in this stage will be used to improve the products and services, increase brand awareness and market shares, offset financial losses, and develop a business expansion plan.
The next funding stage is the Series B stage. The startup founders should use the Series A fund for daily operations, product improvement, and any other business activities. By this time, the startups should already have a significant number of users and steady streams of revenue. Investors may also serve as consultants to provide valuable knowledge, experience, insights, and advice to the founders and collaborate with the startups to help them with business development.
Similar to the Series A stage, the investors for the Series B stage are venture capital firms and institutional investors. After raising the fund successfully, it will be used for scaling the business. The founders will need to hire new talents to expand various teams, adopt more business development to attract potential customers, conduct various marketing activities to increase their market presence and improve customer support service to keep a low churn rate. All these activities will help to increase market share and generate more sales.
The Series C stage is the fifth startup funding stage. By this time, the company should have expanded and generated substantial revenue. When a startup is able to navigate its way to this stage, it gives investors more confidence that they may succeed. As a result, the founders may find it easier to raise the Series C fund. For this stage, the investors may include not only venture capital firms, but also private equity firms, investment banks, and other institutional investors. The Series C fund can be used to expand business internationally into new markets, develop new products, and even acquire smaller companies.
As there is no limit on the number of funding rounds a startup can undergo, it can undertake as many fundraising series as required in order to help it achieve its objectives. A startup may raise a Series D fund or beyond if it misses its targets set in Series C or has additional targets that it aims to achieve.
Initial public offering (IPO) represents the final stage of transitioning from a private company to a public company. When a company decides to be listed on a stock exchange and sell its shares to the public through it, it will go through the IPO process. However, it does not mean that every company can be listed on a stock exchange. The IPO process is complex, time-consuming, and requires the participation of accountants, underwriters, lawyers, and other professionals. It is also often for the company to look for investment banks to support its IPO process.
When founders allow investors to invest in their startups, it means that the investors gain a share of ownership of the startups. In other words, the startup founders are giving up a share of their equity to the investors in exchange for financial support to sustain their business. As a result, the investors can share their opinions and influence any decision on product development, business development, marketing, and recruitment. Therefore, it is important for startup founders to consider if it is necessary to raise funds for their startups and whether they can work well with potential investors.