A Quick Guide To The Stages Of Startup Funding
While no two startups are the same, most successful businesses tend to follow a similar path from initial idea, to MVP, to eventual product-market fit. And along the way most businesses also follow a similar path of financing. In this blog we provide a quick breakdown of the stages of the financing process for a startup.
Keep in mind that not every business goes through every stage in this exact order—for many businesses, some stages will be repeated or even skipped entirely, and the length of time any business will spend in a certain stage will be unique to each one.
Stage 0: Friends & Family / Personal Savings / Bootstrapping Stage
This is often is the first money into a startup when it is in the market research and early product/service development phase.
It can be from the founder’s savings or from family, friends, and close acquaintances. This capital can be received in exchange for common stock (shares) or as a loan. Often times the security used at this stage is a convertible note.
Note that credit cards can also be used as a funding option during early development of a startup, although we don’t recommend this!
Stage 1: Angel Investor Funding
Angel Investors are usually individuals who are not close family or friends. They are sometimes professional investors or can also just be industry colleagues who are accredited investors under SEC law.
An angel investor is usually a business professional, entrepreneur, small business owner, or even a corporate leader who is looking to take on risks of investing in brand new business, companies and startups.
Angel investors provide not only seed money for your business, but they will also be making a time investment in you and they will want to know who they are placing their trust in prior to writing a check for you and your business. An angel investor's value to a start-up is likely to be much more than pure monetary value. A lot of these investors are going to offer relevant business experience, and they will be fully aware of the different risks associated with the investment prior to making it.
It can take a lot of time to find someone willing to place a bet on you. Angels are not only going to be providing you with start-up funding, but they are also going to be placing a bet on you as a founder. Because of this, you typically won't be able to find one by using traditional methods like cold calling, simply because you have to build a strong sense of trust in your responsibility to your business & customers.
That said, one fantastic first resource to turn to is this regularly updated, open-source document that lists HUNDREDS of the largest female angel investors, along with the type of investments they typically make (seed, early stage, etc.), what geographical regions they typically work within, and some basic social media information:
U.S. Women Angels Investors Airtable (Downloadable)
Stage 3: Venture Capital Financing
VC financing can be done in multiple rounds, usually beginning with Pre-Seed (usually between $500k to $2m), then Seed ($2m to $5m) and then Series A ($5m to 15m) and so on with each having a designated letter of the alphabet.
Every round of the venture capital funding should reflect an increase in valuation; for instance, the Series B round can value the stock of a company that is doing well higher than Series A; subsequently, Series C stock valuation will be higher than Series B.
If the business is struggling, it can benefit from subsequent rounds of the financing series. However, the valuation will not be as high as with the previous series, which is something known as a “Down Round.”
Usually the round could include strategic investors who participate by offering a distinct value like product growth or marketing prowess. The strategic investors can take part in the series of financing, investing in exchange for preferred stock instead of standard stock that seed or insider capital sources and even angel investors get.
Some of the potential investors in the Series A, B, and C for the rounding of funding include:
Venture Capitalists
Hedge Funds
Accelerators
Private Equity Firms
Super Angel Investors
Banks
Late-stage VCs
Stage 4: Mezzanine Financing & Bridge Loans
Mezzanine or “Bridge” is a round of financing often used 6 – 12 months before an initial public offering. The company can use the IPO proceeds to repay bridge financing investors.
Stage 5: IPO (Initial Public Offering)
Lastly, startups can raise capital through the sale of stock or shares to the public, which is known as an IPO (Initial Public Offering).
The opening price for the company’s stock is predetermined with the aid of investment bankers or financiers who pledge to sell a specific amount of the business’ shares at a particular cost to help raise the money needed.
The offered stock is then traded through a stock exchange like the New York Stock Exchange or NASDAQ.