Every business needs money to operate, survive and grow. Funding is the most crucial financial lifeline for startups to expand their business. In fact, a startup goes through multiple rounds of funding during its development lifecycle.
Each stage of development of a startup requires a different round of funding. Typically, each startup, depending on the stage of its success may go through around seven stages of funding.
Such stages are as follows:
a) Pre-seed stage funding:
It is the stage wherein the founders will be brainstorming on the launch of a startup with a concept in hand (a developed prototype). Founders need money to make a start and to support their vision and ideology.
At this stage, funding mostly will come either from self or from near and dear ones (i.e family, friends etc.,) and to some extent micro venture capitalists. In simple, this is a phase, wherein funding will be mostly available from self or from micro financing sources.
b) Seed stage:
Seed funding will be first official funding of a startup that enables the startups to infuse financial strength in its wings to fly. In the stage, startup will need funding to develop its concept into a full-scale product or prototype with business viability.
At this juncture, Angel investors and early venture capitalists pump the funds into startups to give it the financial arm required to establish full scale prototype.
c) Series A:
Series A is a funding stage wherein, the startups have advanced their progress to next stage and to pitch investors at this stage, startups should have a strong business model with long-term viability.
To get Series A funding is no easy task, not many companies make it up to here as they have a great plan on paper, and are clueless about the direction as to where their business ship is going.
Typically, only with a successful pitch of long term game plan of business association, startups are able to grab investors' eyeballs to pump in series A round funding. Mostly accelerator, super angel investors, and venture capitalists take the hat of investors in this critical round.
d) Series B funding:
Infusion of series A funding into a startup is a declaration to the corporate world that a brand has emerged and ready to hold firm its place on the corporate arena.
So to further cement its brand and place in the corporate arena, such startup needs another round of funding in the form of series B funding. This form of funding would be sponsored by venture capitalists or late-stage venture capitalists.
Companies which reached series A funding would be somewhat successful, however, to further expand its business, such companies go for series B funding to further strengthen and develop current line of successful business.
e) Series C funding:
If a startup reaches a point of series B funding means that it is a well- established brand with a strong customer base with recurring business model. Then why would such a company need another round of funding despite having strong and successful business model?
Such company needs funding to venture into a new line of business or to add new products/service to its portfolio or to procure another entity in existing line of business or a new line of business.
Typically, after series B funding, company needs series C funding to diversify its existing business portfolio or add new business portfolios under its belt.
Source for series C funding typically are late-stage venture capitalists, private equity firms and hedge funds.
f) Mezzanine stage:
There is a stage, where companies will be gearing up for another shot of funding, prior to venturing into an IPO. At such stage, companies will have mezzanine form of hybrid loan structure.
For investors, this form of funding provides high returns. Companies offer investors a loan structure with a combination of debt and equity. This enables investors to convert debt into equity stock as per agreed terms and conditions.
Source for such funding are private equity firms and hedge funds
g) IPO:
Initial public offering (IPO) is the ultimate form of funding - this throws open the window for any company to raise funds directly from the public by issuing shares for subscription.
To reach to the stage of issuing IPO is no cakewalk, a lot of effort, time and money has to be invested to build a solid brand and recall value for the company as without a brand name in the public, IPOs will fall flat.
However, companies need to be mindful of exorbitant valuation of shares at IPO as many recent unicorns shares have tanked in no time following the IPOs destroying brand value built over the years and evaporating investors' money in a matter of no time.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.