Getting funding is a pre-requisite for kick off a start-up venture. Regardless of the stage of start-up life, you will always need funds to run the business smoothly.
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 pathway of what they are into investing in your firm.
There are five major stages involved in funding a startup, which is explained below:
- Seed Capital:
Seed Capital is the very first investment in business. Usually, it comes from founder’s personal savings, his friends & family, or closed ones. This round is sourced from professional or semi-professional investors either individually or in a group.
- Angel Investor Funding:
Usually, Seed Capital is limited for start-up. More often than not entrepreneur tries to tap wealthy individuals excluding their family & friends are termed as an “Angel investors”.
Money received from an angel investor is a loan that is convertible to preferred stock. It often converts to the Series A round of funding (below)
Angel investors are different from other alternate investment options such as Venture Capital (as they use their own money). They may invest individually or also pool their money in a group.
- 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 the 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 product/ service is 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
- Mezzanine Financing & Bridge Loans:
Mezzanine financing is a mix of debt and equity financing. This financing option gives the financier 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 is starting 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.
- 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 selling ‘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.