The lessons learned from fundraising for your childhood sports team may come in handy as you begin to grow your start-up. While 29% of start-ups fail after running out of money, series funding is a useful way to overcome this obstacle. Fundraising may be time consuming, but it is necessary to find investors to prevent your new business from running out of money before it can even begin. This process begins with pre-seed funding, where the founders of a startup raise money from themselves, friends, family, or even an angel investor to begin the development of a prototype or proof-of-concept before moving into the official first phase of fundraising: seed funding.
S is for Seed Funding
To best understand seed funding, it can be described as the seed that will grow the company. Banks may not be willing to invest in a brand-new company, revealing the importance of seed funding. The capital needed by early-stage startups is usually raised from family, friends, and angel investors. The goal of seed funding is to collect enough money to build a plan for their business model to attract investors. Typical seed rounds often bring in around $6 million, with this number steadily increasing each year. A company’s valuation after seed round investment is usually between $5 million and $10 million. While this funding usually just covers the cost of creating a business proposal, this phase can be the end of a startup’s fundraising journey if they run out of runway (cash) or decide they do not need more money.
E is for Entrepreneur
Start-up entrepreneurs are the individuals who seek funding to transform their ideas into businesses.
They aim to fill a gap in the market with their idea while maximizing profitability. Entrepreneurs are usually the founders of their companies whose goal is to convince investors to fund their business. While their own funding often drives the pre-seed phase, their ultimate goal is to move beyond seed funding into the world of series funding to attract additional investments.
R is for Raising Capital
Start-up founders need to raise capital for a variety of reasons. Developing a product and starting a business is expensive, with costs increasing as the company continues to grow. Start-ups need money to develop their product and operation costs increase as they increase the scale of production. Additionally, they need money to hire more employees, including marketing specialists and developers.
I is for Investors
“Love money”
Before venturing into the world of series funding, entrepreneurs may look to their family and friends to raise money. First-time entrepreneurs often ask for “love money” when they are unable to get credit or capital from traditional financial options such as banks.
Angel investors
Angel investors are wealthy private investors who provide initial funding for start-ups in exchange for equity in the company. Since it is risky to invest in a start-up, angel investors expect a high rate of return on their investments. They will generally invest between $25,000 to $100,000 in an early-stage start-up company, with greater investments going to companies further along in development.
Venture capitalists
The final category of investors are venture capitalists (VCs), who are financial professionals that invest capital in a start-up in exchange for equity in the company. While angel investors use their own money, VCs invest using money from venture capital firms. VCs specialize in a variety of industries and invest across the spectrum of start-up development.
E is for Equity Crowdfunding
Equity crowdfunding is a method for startups to raise capital from investors in exchange for ownership of their business. Anyone can take part in equity crowdfunding (if they are over the age of 18), allowing founders to reach a wide pool of investors through online platforms. Additionally, there is no debt component involved because start-ups sell shares of their business instead of making payments toward a business loan. Also, investors involved in equity crowdfunding typically take smaller takes in the company than venture capitalists. With equity crowdfunding, entrepreneurs can set their own terms, but problems may arise if investors want a say in business operations.
S is for Series Funding
Once a start-up has developed a plan for their business model using the money generated from pre-seed and seed funding, they begin rounds of series funding to increase revenue. Each series comes with more investments and new valuations as the company grows.
Series A
The first round of series funding is usually led by one investor, which will usually inspire other investors to follow. Investors may include venture capitalists, angel investors, and equity crowdfunding. Many start-ups become victims of the “Series A Crunch,” where they cannot generate enough funding to continue growing their operations.
Series B
Next, start-ups begin Series B funding to expand their companies. This is where they look to scale up their companies by hiring a bigger team to reach more customers. Often, the same investors from Series A invest in Series B to ensure they own a sizable part of equity in the company after the new valuation.
Series C
If a company can reach Series C funding, they often look to reach new markets by acquiring other businesses and developing new products. Some start-ups even move into the international market. This is often the final opportunity for a private company to increase their valuation before offering shares to private investors through an Initial Public Offering (IPO) or undergoing an acquisition by a larger company.
Series D and E
While most start-ups stop at Series C, sometimes Series D funding is necessary in order to expand further before an IPO or acquisition. Sometimes founders want to stay private or increase their value before going public. However, sometimes a Series D round occurs at a lower valuation than the previous round. This “down round” occurs because the business did not meet its previous funding or revenue goals. “Down rounds” usually reduce the confidence of investors and the market in the start-up, lowering the value of the stock. If a Series D round is not enough, companies will begin a round of Series E funding for many of the same reasons.
Start-ups can expect to raise a wide range of money through seed and series funding, depending on the current market, their business model, the terms of their deals, and other factors. This money is critical to a company’s growth, but it must be used effectively to build a strong foundation for future development. Series funding is a great method for startups to raise enough money to grow their businesses, but founders usually fundraise using a combination of series seed funding with venture capital, crowdfunding, small business loans, small business grants, private investors, and angel investors.
– Masin Kearney