Getting funds is a crucial element to kick off a start-up business. Regardless of where you are in the startup phase of your life, you need money to keep the momentum going.
It is very important to understand different needs of your business at each stage so that you can engage confidence in investors with a clear idea of what they are investing in your firm.
There are five major stages involved in funding a startup, which are explained below:
1. Seed Capital:
Seed Capital is the very first investment in business. Usually, it comes from founder’s personal savings, his friends & family, or close ones. This round is sourced from professional or semi-professional investors either individually or in a group.
2. Angel Investor funding:
Seed Capital is sometimes limited and so it is often necessary for an entrepreneur to tap into wealthy individuals outside their friends & family – often called as “Angel investors”
Money received from an angel investor is a loan that is convertible to a preferred stock. It is often converted to the Series A round of funding.Angel investors differ from other investment entities such as Venture Capital as they use their own money. They may invest individually or also pool their money in a group.
3. Venture Capital Financing (VC):
Venture Capital (VC) firm is a group of investors who take investment from wealthy people, who want to grow their wealth. They take this money and invest in risky business deemed to have high growth potential.
Venture Capital funding is made when the business grows beyond the startup phase when they have already started distributing/selling their product or service, even though they may not be profitable yet.
In case of negative profit, Venture Capital financing is often used to offset the negative cash flow. There are multiple rounds of VC funding – Series A, Series B, Series C and so on…
Series A: The primary function of Series A investment is usually to take a startup to the next level. At this stage, startups have a strongly defined goal for the product or service. Capital used at this stage is often used to meet targets and defined business goals.
Series B: By the time a startup is heading for Series B investment, it is well on its way to establishing its business. The products/services are managed well, the advertising is going strong and customers or users are actively purchasing an associated product or service as planned.
Series C and beyond: A Venture capital firm goes for this round of funding when the company has proved its mettle and is a success in the market. Series C round of funding is made when the company looks for greater market share, acquisitions to develop and expand their product and services share. It is the last stage in company’s growth cycle before an IPO.
4. Mezzanine Financing & Bridge Loans:
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the rights to convert to an ownership or equity interest in the company in case of default, after venture capital companies and other senior lenders are paid.
At this point, the company has several hundred employees and is operating in more than one country. The company has already started to speak with investment banks and the leadership team.
Mezzanine financing is often used 6 to 12 months before an IPO and when IPO’s proceeds are used by the company to pay back the mezzanine financing investor.
5. IPO (Initial Public Offering):
IPO is the very first sale of stock issued by a company to the public. Finally, companies can raise money through selling stock to the public. The IPO’s opening stock price is typically set with the help of investment bankers who commit to sell ‘X’ number of company’s shares at ‘Y’ price, raising money for the company. Once the stock is out, it is traded on a stock exchange.