Stages of Start-up Funding

Startup funding generally uses the process of investors investing money into the company in exchange for ownership, or partial ownership of the company.

• In business terms, ownership is termed ‘equity’- investors in the company primarily demand equity in exchange for their investment in the business/startup.

It is important to note that businesses that do not follow a start up model, meaning ones that are not a ‘disruptive’ new idea or have the need to grow very fast, do not usually use these stages to raise money. In most cases, they are either self-financed (bootstrapped as mentioned earlier) or use loans from big banks to fund any gaps in operations.

The following stages are appropriate for you if you are planning on building a ‘startup’- meaning you have an idea that is both disruptive and can grow very fast!

• Pre-seed Funding: takes place while the founders are still getting their start-ups/business off the ground. This is the earliest stage of investment for a company and typically involves investments from friends, families and people very close to the founder.
  • It is difficult to predict how long this funding round is, it all depends on the pace at which the company is growing.

• Seed Funding: In general, this is the first round a company officially raises funds.
  • This money is used by the company to finance early steps like doing research, launching a product/service, marketing and building an audience etc.
  • This money is used by the founder to hire a team or test the idea in the market.
  • The funding size of this round also varies significantly depending on market size, investor preference etc.

• Series A Funding: this is generally the first large round of funding a company raises. It is raised after a company has already built a customer-base and has a product/service ready for the market.
  • With Series A Funding, the company is able to expand into more products and also focus on customer acquisition through marketing.
  • In general, the investors in this round are private equity firms.

• Series B Funding: the funding in this round focuses on the company supporting the recruitment of new talent, marketing etc.
  • This stage attracts investments from both private equity firms and bigger investment firms.

• Series C and beyond: in these rounds, companies focus on expanding into new markets (potentially new countries), creating new products/services and hiring a seasoned management team to run the business smoothly.
  • Since it is generally assumed that a start-up raising a Series C and beyond funding is usually successful in nature, a lot more investors get involved because of the relatively lower risk involved and the fund raised can be in hundreds of millions of US dollars.
  • In best case scenario, start-ups end up listing on the stock exchange and trade their shares publicly, making investment opportunities available to the general public but are also put under immense scrutiny by their regulators.
  • The best examples of startups listed on the stock exchange are Uber, Airbnb etc.