Having a great idea for a new product or service is just the beginning. Founding and developing a startup that will sell this new product or service requires a lot of time, hard work, dedication, and, of course, money.
Unless an entrepreneur has enough capital to launch their own startup, they will have to find different business investment opportunities to raise the funds. Raising capital can be difficult and intimidating, which is why the dedication of an entrepreneur can make a difference between success and failure.
Let’s learn more about the different startup funding stages so we can figure out where the money that helps launch new businesses comes from:
Stage #1: Seed funding
The first thing a startup should do is test the market while defining how they will turn their idea into a real product or service.
The first funding stage of a startup is seed funding. The founders of the startup will be the first ones to invest some of their savings into their new venture, but they can also get some support from their friends and family, and even turn to crowdfunding.
Many promising startups are able to benefit from angel investments. Angel investors are investors who focus on helping entrepreneurs in need of seed funding, since it allows them to purchase stocks of the startups they finance for an affordable price.
If a startup can successfully raise seed funding, they will be able to go on and to develop and launch their product or service.
Stage #2: Series A funding
If the seed startup funding stages was not enough to get the startup going so it can earn enough money to grow on its own, the founders will turn to venture capital financing. At this stage, their focus will mostly be on establishing their business model, and trying to sell their product or service.
The first round of venture capital financing is called series A funding. Since the startup is not profitable yet, it will sell stocks to investors who believe in what they have to offer. Startups usually sell between 10% and 30% of their parts during this round of funding.
Before investing in a startup, investors will want to know about how the company is being managed, about the risks they could face, and about their potential for growth. Analysts will be able to provide them with a valuation of the startup.
Stage #3: Series B funding
After the startup has been established, it could still need some additional funds to scale up and meet the demand for their product or service. Analysts will provide another valuation of the company, and series B funding will begin.
At this stage, investing in the startup is less risky, so more investors should be interested. The same people who invested in series A might be interested in investing some more money, but the startup will also catch the attention of firms that specialize in investing.
The startup should be able to raise funds more easily than in previous stages. However, investors will be paying more money for less equity than those who invested during seed funding or series A funding.
Many successful startups achieve their goals during series B funding, but those who want to go further can move on to the next round of venture capital financing.
Stage #4: Series C funding
A startup that makes it this far is considered successful and well established. But if they want to expand, to reach new markets, and to develop new products and services, they can turn to series C funding. Some startups can even use this stage of funding to purchase other startups.
Since the startup is now considered an established business, it will be much easier for them to find investors. These investors might be some of the company’s previous investors, as well as private equity firms and banks.
For most businesses, no additional funding stage is necessary. However, if a business was not able to raise enough funds to meet their expansion goals during their series C funding, they might move on to series D, E, or F.
However, moving to these stages of venture capital financing might signal that the business is facing some challenges that it can’t overcome, which doesn’t look good to potential investors.
Stage #5: IPO funding
Finally, a business can decide to go through IPO, or Initial Public Offering funding. During this stage, it can sell stocks to the general public. Selling stocks can allow a business to raise some more funds, but it also comes with other benefits.
IPO funding can generate profit for investors, and it can boost the reputation of a business. During this stage, an investment bank will commit to selling shares of the business to the general public, which will help the business stay profitable and successful in the long run.