All startups work on brilliant ideas, hard work, and of course, funding. However, 94% of startups fall off in the first year due to lack of funds. Finding the right financing for an early startup is a long, challenging, and often futile process. To get the idea of a great business into the market, one needs to know all the options for raising the right money for the company and needs to research and work on them.
There are several ways to gain funds for a startup, and all of them vary depending on the company. Some companies take years to find the right investments to take off in the market, while some companies are lucky enough to see them in days after establishing the company.
Before finding the investors, the entrepreneur needs to analyze what all is required for the company, and needs to create a detailed list of all the company’s operating, development, marketing, recruitment and server costs.
There are stages in which a company can find its investors to develop the company and help it grow.
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The first stage: Bootstrapping:
Bootstrapping or self-funding is the early stage of funding for a business. As the old 19th-century expression says, “pulling up by one’s bootstraps,” bootstrapping refers to the initial financing for the company which is invested by the founder himself, with all the risks considered. At this stage, the company has no outside support or the exposure to gain any investors from outside. Every startup needs to go through this stage, in which the entrepreneurs, along with co-founders, have to fund their company with their savings or debts if required. Self-funding is also sometimes executed with the money earned from the initial stages if the company is put out well in the market in the initial stages itself.
This stage also called the preseed stage, is the step where the entrepreneurs seek guidance from the experts, who have also been through this stage. Family, friends also usually come to rescue during this stage, but their chances of investing are slightly low. The entrepreneur needs to put all the available sources into the best action he can get, with meager expectations. Because if there is any risk, the investors usually are left with nothing but agony.
This stage is the riskiest stage as the entrepreneur will be solely responsible for all the decisions he makes; however, this also gives the entrepreneur the total control over the company. Bootstrapping lets the entrepreneurs take all the risks with the company as they want, as there is no pressure from outside investors. At this stage, the entrepreneurs are the boss of themselves. However, this stage can also be a bit disadvantageous to the company as it lacks the respect that well-known investors bring to the company.
After the first stage of preseeding, the entrepreneurs should set themselves to plant the seeds in the market. While the preseeding only let the company take off of the ground, this stage makes it to the next level, by giving the company the right outreach in the market with the most appropriate and powerful marketing strategy. One can look at this stage as the actual process of planting a seed, hoping for the business to grow into the tree.
The seed funding stage helps a company to find its investors, taking its steps into the market with the right product development and market research. This stage is used to hire a founding team to bring out all these tasks and help the company determine what the final product will be and what the target audience for the company are.
Investors in this stage are the family and friends again, along with venture capital companies, incubators, and others. “Angel Investors” are another type of investors at this stage, who offers to invest in the company with their own money and expect an equity stake in the startup in exchange. Some companies have considered this stage very important in taking their business forward, as this stage helps the company take off a better way in the market. These companies are those that do not even go to the next step.
Series A Funding:
Once the startup creates its face in the market with the consistent revenue figures and an excellent reputation of hard work, its time for a series A investment for the company, Series A is generally done when there is already some revenue for the company, but not enough to make a significant profit. Series A is the stage where the investors from outside the circle come into the company, and the ownership extends itself to these people. Investors carefully analyze the company’s growth from the seed funding and the risks involved in the company. Series A is also the stage where the highest risk is involved. They also look at the market size and the team of the founding reputation.
This stage also bases itself on equity financing, where the company offers its shares for the investors. However, the startups usually give away the stocks that they prefer to give away and the investors do not get the rights to vote in the company, and the returns that the investors receive in this stage is usually less than that of the seed funding stage. This stage is where the formality of investing begins, with all the legal documents, validations, and agreements.
The main aim of a Series A funding is to gain the cash required for further market research to take the company forward. A is the stage that secures the company’s consistent growth and achieving all of the milestones that the company wanted in its initial stages. Series A funding aims at the company growing in the market to attract other high investors in the future.
Series B Funding:
Series b funding is the second round of fundraising for a company. Series B is the stage that involves investment, including private equity investors and capitalists. This stage is usually only after the business is developed after accomplishing its goals from the series A funding. Unlike the previous steps where the investments based on belief and assumptions, this funding is on the based on all factors that show the company’s constant success and consistency in growth.
The investors, before funding, evaluate the company by their revenue forecasts, and the company’s performance in the market, while also comparing the startup to its usual competitors. The investors also examine the employees, their talents, intelligence, and dedication toward the company.
Series B is the stage where the company gets a broader market reach with the help of investors, to create more growth. At this stage, the company is all set to launch its service or products into the market, with all the competition. This stage is the less risky area for the investors, as the company has already set its user base and is ready for the market competition.
Series B funding results in the growth of customers for the company, and it aims to build a stronger team to sustain the growing customer rate. Most investors in this stage are the same from the Series A as the investors tend to reinvest in the company that they have believed in.
Series C Funding:
Series C is the stage where the companies that are doing exceptionally well land in, to take their service to a broader market. In other words, this is the stage where a company expands itself from its own country to international countries, as they are successful enough to sustain a bigger market. The companies usually look at series C funds to acquire other businesses in the market and grow stronger in the market.
In series C funding, the investors usually invest in the company to expect double the cash they’ve funded. Strictly speaking, firms that aim to get series C funding are not any longer startups. They’re typically established, productive firms in their late stages of development, with stable revenues and profits. Their core product or services generate robust demand within the marketplace, attracting a considerable client base. This stage is entirely based on becoming successful easily and quickly at the same time. The companies looking for Series C funding attract investment bankers and other private equity firms as they have already proved themselves to be the best in the market at the position.
The investors in this stage usually expect convertible shares, unlike the previous series. Many investors from last funding spherical (venture capital corporations and angel investors) tend to participate in the series C funding round also. The players will value more highly to inject extra capital within the company and attract new investors.
Series D and E Funding:
After achieving consistent growth and success in the market, the companies, sometimes prefer the Series D and E funding. The companies might want to expand their growth further, by grabbing more opportunities before going for an IPO and might lack the money to get there. However, this might also be a “down round,” where the company hasn’t reached its targets from the Series C funding, which resulted in the downfall of the sales and remuneration of the company.
The companies barely consider these stages. However, these rounds might as well result in the enormous growth of the startup. Venture capitalists and investment bankers are usually the investment players in these stages as well, and the amount raised is generally very unique from before.
Initial public offering or IPO is the stage where the company decides to raise its funds from the public and institutional investors by selling the shares of the company. IPO is the stage that transits the company from being a private company to a public company. Here is the most crucial step of the company’s career as it allows a company to raise its money from public investors. It is like going non-incognito.
This stage is usually preferred by companies when they reach the highest evaluation and achieve unicorn status. It gives the company a chance to expand their growth in all branches. IPO also buys the market’s trust due to gained transparency. IPO shares of a company are measures through underwriting due diligence. The private shares that are owned by investors become public ownership.
The public market allows millions of people to invest in the company and buy shares, to expand the company and its growth. IPO also helps in better and acquiring skilled employees through liquid stock equity participation. It gives a company lesser debts with a lower cost of capital. IPO makes the company look bigger in reputation than it already is, which results in more sales and profits. However, IPO also brings legal risks to the company, such as private securities class action lawsuits and shareholder actions.
Understanding fundraising for a startup is not a difficult task. However, it comes with complications of its own. To maintain successful funding for a startup, using all these series is vital.
Besides all the ways mentioned above and equity shares, fundraising can also come out in other different ways like business loans and private investors.