Startups need more than just a great idea to flourish. They demand a lot of time, commitment, dedication, discipline, and most importantly, funds. According to a 2016 British Business Bank Survey, over 60% of startups require an external source of funds to establish a firm foundation. In this post, we’ll look at the startup stages of funding before IPO that every entrepreneur should know.
1. Pre-Seed Funding Stage (Bootstrapping)
The bootstrapping stage of funding comes in so early that it’s actually not even regarded as startup funding. It refers to the time period where a startup is working to get their operations off ground. Nonetheless, it’s likely that the investors won’t invest in exchange for equity in the startup at this stage.
The pre-seed funding stage often involves using own funds and resources to scale the startup. The founders commit their own money and try to grow in a resourceful manner. Other common pre-seed investors include friends and family, and early stage venture funds (micro VCs).
2. Seed Funding Stage
Here, it’s time for investors to actually plant the seed. Using the analogy of planting a tree, the initial funding stage is the “seed” that allow the startup to flourish. With the appropriate nutrients, i.e. successful business strategies and an undying dedication from the entrepreneur, the startup can successfully grow into a tree.
During this stage, startup might have to part with equity, since the investors are taking huge risks investing in the business at this level. The most common investors at this stage include family and friends, Micro VCs, Angle Investors, and crowdfunding.
3. Series A Funding
This is the first round of venture capital financing. At this point, the startup must have their product already developed and have a customer base, ideally with a consistent flow of revenue. Series A funding allows the startup to scale itself across different markets.
The potential investors here include Super Angel investors, Accelerators, and Venture Capitalists.
By this stage, the startup has already developed a substantial user-base and have a consistent flow of revenue. Their business strategy has been tested in the real world, and they’ve proven to the investors that they can scale up.
With Series B funding, the investors help the startup to expand its horizons by funding its market reach activities, forming operational teams (business development, marketing, customer service) and increasing their market share. Potential investors here are Late Stage VCs and Venture Capitalists.
5. Series C
By the time the startup reaches here, it is on a growth trajectory, and is looking for funding to reach even new markets, build new products, and to strategically acquire startups. Here, investors are happy to fund a successful startup, and are focused on scaling up the business as rapidly as possible.
The likely investors here are Private Equity Firms, Late Stage VCs, Banks, and Hedge Funds.
6. Series D and Beyond
Not many startups need to reach this stage. In fact, it’s often used to raise funds for a specific situation like a merger, or to assist with reaching its growth goal. Series C and Series D funding rounds are often the final stages of funding before IPO and provides the most viable solutions for issues regarding mergers and acquisitions.
7. IPO (Initial Public Offering)
An IPO is the process of offering corporate shares to the public for the first time in the life of a company. Startups that still need more funding will use this process to get more funds.