Startup Funding Rounds

The Ultimate Guide to Startup Funding Rounds

All startup companies go through different stages. They face different challenges. This is not new. However, there is one that remains a constant challenge. Yes, you guessed that right; it is raising funds. As an entrepreneur grows from round to round, you get to meet different individuals with different mindsets and requirements. This article plans on providing you with the ultimate guide to startup funding rounds.

1st stage

This is about time you go official and register your company. You can do the basic, stress-free parts here, including picking a cool name. Depending on your creative skills, this can be difficult or easy.

Apart from that, more decisions are awaiting your attention. These need to be addressed to make sure that your startup is future-proof and attractive to investors.

We listed the following aspects for you to check out and get a clear idea:

  • Incorporation structure
  • Licensing requirements
  • Intellectual property
  • Optional pool for future employees

Before starting to properly raise seed funding, you will need a well-developed minimum viable product (MVP), early traction, a good team, and in some cases, great customer experiences that portray the opportunity for your business.

Minimum Viable Product Defined
In Order to Help Innovators Gain Product Validation, They Create a Minimum Viable Product (MVP)

So basically, the money from the first round will be used to go through to the next round of startup funding.

Investors in the pre-seed round are usually family, friends, or business angels. For a 5%–10% equity stake, the investments can range from $50,000–$200,000. They are the ones who will provide you with enough runway to grow your MVP.

In the seed funding round, you raise capital from family and friends, incubators, angel investors, or even venture capitalists. This finances product development and initial market entry to prove product-market fit and initial growth.

When should you talk to investors?

Well, this is a tricky question. To be honest, there is no right or wrong answer to this. Basically, it is never too early or too late to call investors. You can start as early as possible to establish a solid relationship with investors by having casual conversations regarding your startup (but not being a burden to their work and any other aspects,) the market opportunity, and what they are looking for in investments. Make sure to take this casual contact as immediate feedback. You can use all this information at the time of fundraising.

However, it would be best to stay away from full-blown pitches until you have gathered enough evidence to really convince them. When you are ready, keep in mind that investors need to be sure that your idea is compelling. They should see that there is a good opportunity and that you are the right team to execute.

It usually differs according to different circumstances. For some founders, a story and their reputation are all it takes. But the others would want a well-built idea, a great understanding of the market opportunity, a minimum viable product, and some initial traction.

Check if you have all those ingredients. If you do, then you are set and ready to pursue an investment.

How much should I ask for?

In theory, you would get just enough money to reach profitability while not giving away a lot of equity. However, in practicality, this might not work out just the way you want. Almost all startups need a lot of follow-up rounds before becoming a self-sustaining, growing company.

As described above, be it initial profitability or the next funding round, it is extremely important to estimate how much you will need to get there as a self-sustaining and growing company. You must raise enough money to get to your next startup funding round without letting too much of your startup go within the next 12 to 18 months. 

There’s a huge difference in the amount of funds raised by businesses at this stage. So we can’t predict an exact amount. But you can expect rounds to range from $50,000 to $2,000,000.

How should I value my company?

To be honest, there is no way to determine the exact value of your startup at this stage. Remember that you can’t project sales if data points are not available.

Plus, it is challenging to value the skills of a team that hasn’t been offered such a project. Lastly, each investor tends to value the combination of opportunity and skill versus product and delivery differently.

Make sure to raise the right amount of funds to get you into the next startup funding round.

You can shop around, talk to different investors, and allow the market to set the valuation or price cap (in the case of a convertible note) of your business. Other than that, observe similar startups at your stage. Seek a reference point in terms of valuation.

In reality, you should expect to be offered between 10% and 25% at this stage.

In this stage, your entire focus should be on getting enough capital to develop your product, understand your product-market fit, and search for that scalable growth channel.

Usually, a good investor can deliver good advice and share his network while you are rushing to develop your business.

Startup Valuation Methods
Startup Valuation Methods for Startup Funding Rounds

Series A

Suppose you find your product’s market fit, develop a scalable and repeatable product, and finally lay the foundation to create scale in your sales. Then it is time to supercharge your development.

Alright, now this is where a Series A starts.

So what can you do to succeed in this startup funding round? Well, it is all about convincing investors that your startup has the potential to turn into a business with long-term profits.

Investors will look at industry-relevant KPIs and metrics with much focus on your initial revenue and user growth to help their investment thesis.

The funds raised can then be utilized to optimize your product and startup business for scalability while causing your team to generate extraordinary demand. Following your Series A, investors will need to see even larger growth.

Usually, investors for this round include venture capital firms. Other than that, other profiles like family offices, (super) angels, and corporate venture arms can also compete.

Now is also the beginning of some political moves, as you will most likely want several investors on your side.

At this point, one of those will take the lead. That is why you must make sure to pick an investor who is truly in this. This “chosen one” will be an important supporter throughout the lifespan of your business. Remember that. Initial investors that do not take part in the next startup funding round are not a good sign.

Commonly, round sizes can differ largely according to geography, as market size matters. EU rounds could be about $1–5 million, US rounds could range from $2–15 million, and Chinese rounds could go even beyond that for a 20%–35% ownership stake.

Series B

Once you turn your business into a growth machine with Series A funding, you can now grow the company fast enough to meet the generated demand.

Startup Funding Rounds - Series B Financing
Startup Funding Rounds – Defining Series B Funding

Investors need to figure out how you can provide at least 100% revenue growth annually. They also want to figure out where the opportunities are to further scale your startup across markets and geographies.

The capital can then be utilized to grow your team across all key aspects (sales, tech, marketing, and support) to enter additional markets and scale up your business as much as possible.

Now is the best time to find the perfect group of investors. They need to help you grow your business to be prepared for the stock market and/or an attractive acquisition target.

This is what draws a lot of companies towards VCs, as fueling rapid growth is surely their field of expertise. On the other hand, there has been a recent trend toward larger investors participating in these rounds.

At this point, investment sizes vary widely, but a range of $7 million to $10 million for a 20%–35% stake is often cited as a normal round.

Series C or more

This stage plays the biggest role. If you made it up here, then congratulations are in order. You have reached a huge milestone. At this point, you should be running a startup valued at over $100 million with multiple years of aggressive growth behind you.

There is a very smooth plan now for the exit. You must have also had conversations with advisors and investors on what it takes to become a successful public company.

These startup funding rounds are all about optimizing your business. You can do this by aggressively growing in key markets, gaining scale to establish yourself as a dominant player in your field, and hiring good leaders to take your company to the next level.

At this point, you have gone from being a potential acquisition target to a potential acquirer yourself. You can also think about strategic buyouts or multiple talent acquisitions.

This is a demanding funding stage 

Also, this is such a demanding funding stage. As rounds go beyond $50 million, you have to expect grueling and long due diligence processes incorporating even more parties.

This is the stage where a wide spectrum of investors looks at your deal. This goes beyond venture capital. You can expect big corporate investors, financial institutions, hedge funds, and private equity firms to participate in these rounds. At this point, all of them are trying to get themselves a good share before a potential exit.

You may know that there is an abundance of capital interests in high-growth startups. So it is now a common trend to keep raising money in private markets while delaying a potential IPO. But remember that as startup funding rounds keep being added, the investors taking part are also more similar to the big-ticket names that you would expect in an IPO. These investors expect similar standards for corporate governance and due diligence.

Initial Public Offering (IPO)

We are almost done.

An IPO (a.k.a. an initial public offering) is the act of making shares of a private company accessible to the public (on the stock market). This is done to raise funds. In fact, with this process, the business unlocks a large amount of potential funding.

IPO Defined - Startup Funding Rounds
Initial Public Offering (IPO) Defined

Why would I consider an IPO?

Access to more funding faster

The exchange where the securities of public companies are transacted is known as the “public market.” Offering securities to the public market requires an initial public offering (IPO), which is an organization’s first time doing so. Additionally, they are continually subject to the reporting requirements of the Exchange Act. In recent years, there has been a huge amount of funding available in the private market. This happened thanks to a few factors. Among them are the recent success of VCs, the rise of mega-funds, and the entry of public investors like Fidelity. Still, this is much smaller in comparison to the available capital on the public market.

Also, remember that it’s not just about more funding. There’s more to it. The other important element is that it allows you to access it faster. Being a successful public company lets you raise more funding virtually fast via a rights issue.

Shares as a transparent currency

The business listing will give you a transparent valuation. It lets you easily use shares as part of the compensation to the acquirer when doing acquisitions.

Due to the transparency, you can easily compensate employees (both existing and future employees) through the use of stock grants or options.

Liquidity for existing investors

Becoming a publicly traded company provides a liquidity event for existing shareholders. After the IPO and the subsequent lockup period, employees and investors can sell their shares as part of regular trading to monetize their stakes.

It gives investors a chance to close out their positions and return cash to their limited partners.

Institutionalization to enterprise standards

It is required of a public company to comply with additional regulations, improve corporate governance, and increase reporting. Why is it necessary? Well, it all helps build a new level of trustworthiness and transparency.

Gaining this institutionalization can make it easier to access debt markets. Plus, it can be an asset when you attempt to close larger clients.

What’s holding you back?

You have to know that being a public company is not as easy as it seems. It can be expensive.

In the private market, you usually work with professional investors who should properly assess the potential risks involved. On the flip side, the public markets work differently. Theoretically, now is the time that anyone can get their share.

So there are many protection mechanisms to keep such investors safe. This is what leads to regulation and requirements.

Whenever you put up an official release of information, it needs to be factual and fairly distributed among the public.

The process of going public is a monumental task. The process can easily take six months or even more. Given the importance and public nature of the process, the top management will be involved in it.

Also, keep in mind that going public subjects you to increased scrutiny. The quarterly or semi-annual reporting cycle will put heavy pressure on your business to perform in the short term. At this point, you lose the chance to pick your investors. That is why you must have a good team to keep everything under control, minimize bad performance, etc. 

Wrapping up

Raising funds is a challenge for almost any startup entrepreneur. As a startup business grows from round to round, you get to meet various players with different mindsets and requirements. In this article, we have provided you with the ultimate guide to startup funding rounds.

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