From company to company, depending on its capital, what are the expectations from the funding and many other factors?
This quick guide can help you understand different types of Startup funding & give your business better insight into the details of each one of them.
Early Stage: Seed Funding
Startups with low capital looking for funding make use of this option. Often termed “Seed” funding, it is also called venture funds, angel investments and bootstrapping.
If you run a company in this sector, you’ll need to build a product or working model to enhance your chances of receiving funding for it.
No or minimal initial capital is required under this form of funding. Besides that, no major formalities are involved either. It is slowly gaining popularity among new businesses as many entrepreneurs believe that this funding type can help them save money on legal & administrative fees and other related costs.
This form of funding is provided by an individual or a group of people, usually called angel investors or seed accelerators. These individuals receive equity stakes in the business along with the founders.
Seed Funding involves a lot of risks. Large or established Venture Capital funds do not get involved in this form of funding because it is more likely that the business fails due to being under-funded and hence less prepared for all the challenges out there.
This funding type follows a simple pattern: one party offers money to another party in exchange for some equity. It is often fixed as an interest rate. The other terms & conditions vary from business to business and the nature of the investment.
The first seed funding round happens early before starting up your own company or even developing a product/service prototype.
After completing the Seed Funding, if your startup can show growth potential and meet investors’ expectations, it is time for Series A.
Series A or Initial Public Offering (IPO) type of funding is provided by Venture Capital funds, Private Equity funds and Institutional Investors. This round can take a while to complete as it involves a lot of paperwork, negotiations & legal formalities.
At this stage, the company is expected to have an established product or a proven model that can be profitable for investors.
On the other hand, it should also have proved itself capable of meeting its financial obligations and should not require additional investments from seed funds or other parties.
Startups that are looking for funding after passing through an initial stage successfully make use of this option. Series B funding is provided by Venture Capital funds, Private Equity funds, Institutional Investors and angel investors.
A series B, the businesses have a proven track record, and they have been running successfully for quite some time now.
The companies looking for Series B funding are expected to have a clear plan for exponential growth, which will provide returns on investment to the investors and good profits.
After series B, startups move onto this round of funding to gain further capital and support from Venture Capital funds, Private Equity funds and Institutional Investors. This round is also termed as “growth or late-stage funding”.
Series C funding involves a lot of risk for the investors. This is the last major round of investment before an IPO (initial public offering), which means that if your company fails to get positive results in this round, it would be almost impossible to survive further rounds.
A Series C, companies are already generating good profits from their existing products and services. However, they have plans to expand their service/product offering in newer regions or countries to increase the market share of the company & get more investments for future expansion.
Although each of these stages is an excellent platform for businesses to develop and expand, it is essential to remember that the majority of new firms fail after 3-5 years due to nonpayment of their financial obligations.
Apart from meeting all the needs required for survival, compa\nies should also aim at creating a huge pool of investors or funds under their wings to support the businesses in times of crisis.
Entrepreneurs must be ready for these stages since opportunities are not very common, especially at the early stages when your business has just started. If you have high ambitions & eventually want to expand globally, then accepting seed funding at an early stage will not be a clever idea.