Launching a startup is no small feat. It’s not just about finding that great idea that will change the world, as funding and money play an integral part in the process as well. That’s why you need to know the five main startup funding stages that you must go through before getting that shiny “Entrepreneur” name tag.
So, without further ado, here are the startup funding stages that every new business must go through:
This is a funding stage that’s more often than not ignored by newcomers to the startup world. During this stage, the founders focus on developing a proof-of-concept, and they usually collect money from their own pockets as well as friends and family members’.
As the name indicates, seed funding is the stage during which the founders raise money to grow the company and take the startup through its first steps, which include market research and product development.
As part of their startup’s seed funding, founders collect money from relatives, angel investors, venture capital firms, as well as incubators. Crowdfunding is yet another relatively-new way to raise money, which is really getting popular among startup founders and entrepreneurs.
Seed funding can lead to three outcomes:
- If the founders raise enough money for their startup, they may decide to stop at this funding stage.
- Alternatively, they may continue with the rest of the funding rounds.
- If the founders can’t gain enough traction before the raised money runs out, they may decide to fold.
Series Startup Funding Stages
Series funding, again, as the name indicates, is a series of funding stages that follow each other. There are usually four series startup funding stages, A, B, C, and D, but a fifth step, called E, may also be necessary.
Series A Funding
If a startup gets enough traction following seed funding, the founders can move on to the next funding stage, which is Series A. At this stage, the startup should prepare a plan for developing a business model, regardless of whether it has been proven or not (as of yet). The raised money is used to increase revenue and traction.
Series B Funding
Once a startup finds its market fit and is ready to expand and scale-up, it usually moves on to Series B funding. The expansion includes getting new customers as well as growing the team. After all, the founder can’t play all the roles in his company, which is why he/she needs to look for and hire competent people in different departments.
Series C Funding
After dominating its primary market, a company can expand its operations to new markets and develop new products. This is when new funding round, called Series C funding, becomes necessary.
Companies at the Series C stage are usually ready to take their product to the international level. Alternatively, they may be looking to increase their valuation before going for an Initial Public Offering.
Series D Funding
Series D funding isn’t a mandatory step of the startup funding stages. A startup may reach series D funding for one of two reasons:
- The company has found a new expansion opportunity that they’d like to target before going for an IPO.
- The company couldn’t reach the expectations that the founders laid out after the series C funding stage.
A company’s valuation may go down a notch because of series D funding, as it’s known as the down round.
Mezzanine Financing & Bridge Loans
Once the series C, D, or E funding round is done, a startup may go for mezzanine or bridge financing to get to one of three opportunities:
- An IP
- An Acquisition
- A management buyout
In simple words, an IPO, or Initial Public Offering, is the process of offering company shares to the public for the first time.
Investment bankers are the ones who set the opening stock price of an IPO, and they usually commit to selling a certain number of shares for a specific price to raise more money for the company.