Startup Funding Explained In 2 Minutes
You must have seen these kinds of headlines in your daily news reads. Yeah, you have some idea from the title like, A company is getting X amount of money to grow its business.
But have you ever wondered what does the words like seed round, series round, angel investor, venture capital mean?
If the answer to the above question is NO, then we will see how startups use different funding stages to raise money & grow their business in this blog post.
Before starting let’s clear out some terminologies
- Angel Investors (private investor): Is a high net worth individual who funds startups in early stages in exchange for ownership/equity in the company.
- Venture Capitalist (VC): They do the same thing what an angel investor does, but the difference between them is that where an angel investor is a single individual VCs are large firms/funds.
Because they’re bigger, you can potentially get a much larger investment from a VC firm than from an angel. - For an analogy, think of mutual funds, MFs invest in stocks & get their money from individuals who want a high return on their investment. Similarly, VCs get their money from Insurance Companies, Educational Endowments, Pension Funds and Wealthy Individuals & instead of stocks they invest in startups.
- Crowd Funding: It is a method of raising capital through the collective efforts of friends, family, customers & individual investors.
This type of funding is primarily done online via social media or crowdfunding platforms (Kickstarter, Indiegogo etc.) - Hedge Funds: These are investment firms that don’t have any kind of restriction on the type, style(short-selling, taking leverages) of investment they do. They invest in anything that can return a profit.
Bootstrapping (self-funding)
It simply means,
Use your existing resources to get the operations of the ground.
This stage of raising money is so early that it’s not even considered a startup funding round. At this stage, entrepreneurs seek guidance from founders who have been there and have gone through a similar experience as them. It allows them to determine the cost of their idea & develop a business model around it.
Investors at this stage include
- Personal savings: Startup owners invest money from their pocket and try to grow the company in the most resourceful manner.
- Friends & Family: Sometimes, personal savings doesn’t account to much. Because of which owners borrow money from people who know them already.
Seed Round
At this stage,
A startup receives help in determining its final products and demographics
The first in the startup funding stages is “Seed funding”.
You can consider the seed funding stage as an analogy of planting a tree. Ideally, the initial funding is the “seed” which allows any startup to flourish. When you provide appropriate water, i.e. a successful business strategy, alongside the entrepreneur’s dedication, the startup will eventually grow into a “tree”.
As the risk involved in investment is very high, investors get equity against their seed fundings.
Seed funding allows a startup to fund product launch costs, get early traction through marketing, initiate important hiring and further market research for developing product-market fit.
Investors at this stage include
- Angel Investor
- Crowdfunding
- Micro VCs
Series Rounds
When venture capitalists start funding the startups, it’s called the Series round.
This is the time where startups get a lot of money for growing their business. It consists of multiple rounds where multiple investors invest in the company.
Series A
The first round is called “Series A”
Certain conditions need to meet before you can go for Series A funding
- You must have a developed product.
- A customer base with consistent revenue flow.
With series A funding startup tries to scale themselves across different markets.
Investors at this stage include
- Venture Capitalist:
- Accelerators
Series B
This round is similar to the previous round in terms of processes & key players. You get more money from other VCs to expand your business.
Series C
Startups that make it to the series C funding stage should be on their growth path.
This round focuses on scaling the startup as rapidly as possible, with the new earned funding startup tries to
- Build new products.
- Reach new markets.
- Acquire underperforming or competitor startups of the similar industry.
At this stage, the startup’s operations have become less risky; that’s why more investors are coming in to play.
Investors at this stage include
- Venture Capitalists
- Private Equity Firms
- Hedge Funds
- Banks
Series D
Not many startups find a need to go to this stage.
A startup may consider series D round for the following situations.
- Merger with a competitor on agreeable terms.
- Unable to achieve its growth goal with series C funds.
- If it hasn’t gone public yet
IPO
IPO is the process of offering company shares to the general public for the first time.
Benefits of IPO
- Currently, Investors & founders of the company only have the equity of that company. They don’t have any form of cash in their hands.
To cash out, investors & founders can sell their stake to some other investors, but this is a tedious process as many investors may not be interested in your company.
On the other hand, if the company would have been publically traded. Investors & founders can directly sell their shares to the general public. - Mergers are easier for a public organization as it can utilize its public shares to acquire another startup.
- Many public organizations compensate executives through the stock. The stocks of a public organization are more attractive to employees as they can sell the stocks quickly.
I hope now you have a good idea about different startup funding stages😊.
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