Six main types of Funding for Start-up Companies
I cannot even remember how many times I have talked to founders about fundraising. That seems to be one of the most-often talked about topics related to the start-up scene. Everything you do: coming up with the idea, preparing the investors’ deck, perfecting your pitch… name it, all that leads back to the fundraising. Before you dive in deeply to prepare it all, it would be good to take some time and understand what is really Seed or Series A, B and C.
Please note that everyone’s path is unique and does not have to go through all these phases; but once you enter the VC’s world, the path is pretty much defined.
Typically, every founder started at this point. You put some money aside while working for someone else, or you sold your previous start-up, but you start here. There are few things you should do in this phase.
- Purpose: to pinpoint the idea.
- Identify the missing part in the market or a problem you think you can solve.
- Think about the solution.
- Investigate the market.
- Know your competition.
- Start developing your product.
- Amount: it depends, but usually, from $0 to $50,000.
- Who invests: the founder.
A few years ago, this was not recognized as a phase; but with the maturing of the start-up scene and the tech companies’ market, I have seen more and more people doing it.
- Purpose: to develop your idea.
- Develop the prototype.
- Define your sales channels.
- Define your marketing strategies.
- Develop a team.
- Solve all legal problems (licenses, incorporation of company, etc.).
- Develop competition strategy.
- Amount: again, it depends; but roughly, from $25,000 to $250,000.
- Who invests: friends and family, love money from business angels, etc.
This is usually the first type of funding outside of your private circle. This is an extremely important phase since it can define everything afterwards. Once you go through it, you will learn all the problems regarding working with investors, and how to manage documentation, anti-dilution clauses and other issues.
Please note that you can raise multiple seed rounds, not just one.
- Purpose: developing a market-fit product.
- Launching product.
- Showing successful sales results from, at least, one market.
- Identifying sales ceilings and mitigating them.
- Develop and grow a team.
- Amount: usually ranges between $250,000 to $2 million.
- Who invests: Angel investors, Super Angels, Early VCs, etc.
Series A Funding
Or how I like to call it A Big A round. If you have managed to get this far, you are already a seasoned founder. Now, we are entering the real arena. From now on, things will become incredibly busy and they should develop really quickly. From now on, you will experience real adventure; and at some point, you might decide to focus on being just the founder (not the founder and CEO…hiring a seasoned CEO —who used to run multimillion businesses– might actually work to your advantage).
- Purpose: scaling your business and getting your business model perfected or simply getting a real market-product fit.
- Now, you know your product and customer base really well.
- The focus is on growth.
- Scale on all levels: distribution, geographically, across verticals, perfect your business model. If you have a lot of users, you might consider cross-selling. Internet companies could start implementing sales targets as they amass their user-base.
- Amount: usually from $3 million to $10 million, but these amounts can be exceeded.
- Who invests: this is typically led by VC funds. Although, Angels can co-invest; but, they rarely define the pricing of the capital or the valuation outcome.
Series B Funding
I read a couple of years ago that B stands for “building” and I still believe it does. This is the moment when you are really building that dream company of yours with its first HQ and other offices. This is now growing into a serious business and you are already being recognized in the market as a serious force. Series B should help you with that. Here, everything has come together, traction and business model, and big bucks are already around the corner.
- Purpose: to scale your business and build it up across markets.
- Strengthen your sales teams.
- Open new markets across continents.
- Utilize your user-base well.
- Build it up to the next level.
- You might go for minor acquisitions to strengthen your position.
- Amount: from approx. $7 million to several $10s of millions.
- Who invests: I would say that this is deep VC territory. You could see some of the VCs from Series A leading the funding rounds; but also, some more specialized funds focused on later-stage companies with particular industry focus.
Series C Funding
At this stage, your business is well-developed across continents; and now, it is time for the final boost of your business. This might also be the moment when some of the early-stage VCs would like to exit; and you need funding partners with higher firing power. This is the global-expansion stage.
- Purpose: to fund global expansion and internal maturing.
- Launch presence in other markets, not only cover it from your home-base.
- Acquisition of peers or new ideas in the markets which are good fits for you.
- Amounts: typically range from $10s of millions to $100s of millions.
- Who invests: VCs, but also other forms of Funds, Investment Banks, all those interested in late stages.
I have to admit that I have seen also Series D and Series E; but more or less, strategically, they were in the Series C zone – going global.
Naturally, at the end of the road is usually IPO and I cover that topic in my next article , “Let’s go IPOing!”
What I wanted to achieve with this article was for you to understand the phases of your business and to recognize that your immediate strategic steps are those that define for which form of funding you should look. I hope that this helped you identify to whom you should talk and saved you some of your very precious time on your road to building your great company.
Also published on Medium.