With the current development in the startup ecosystem, many entrepreneurs are now becoming interested in getting their startups funded by big investors. The TV channels are hosting a number of reality shows where startup founders are going with an elevator pitch and trying to secure investments from the capitalists participating in the shows. Through these TV Shows, general people who are new in business or maybe still thinking of starting something are now developing a great amount of interest, and have recently generated a good amount of interest in knowing how this whole financing thing works. In this article, I shall try to discuss the different types of financing modalities that are most applicable to startup ideas. If you want to learn the various types of startup funding, this article will guide you on where to start.
Bootstrapping:
The process of starting and running a business using only one’s personal finances or operating revenue is known as “bootstrapping.” This method of financing gives entrepreneurs more leeway to run their businesses how they see fit, but it also puts more pressure on their finances. It is often referred to Self-Funding as well. For many business owners, the first step is self-funding, which entails using personal savings or loans from friends and family to pay for the startup’s early stages. When a founder goes to his friends and family for funding at Bootstrap, it is sometimes informally called an FNF round. Bootstrapping is considered the best option when the business has zero assets or is in a very early idea stage.
Seed Funding:
Once a business is formed with bootstrapping, and the product or service is ready to be tested or marketed, the founders often seek seed funding. Seed funding often comes from Angel Investors, venture capitalists, and crowdfunding sources. Typically at this stage, these companies are so small that banks and large investors do not get comfortable either approving a loan or investing capital. As the business potential is not yet tested at this stage, investing in such startups is highly risky. So, the angel investors who are more likely to take risks to get a higher return, come forward and invest in the initial stage of the business. The seed capitalists in return ask for a greater amount of equity in the company in return for their investment, or a higher interest rate than that of a bank if they are giving loans to the founders.
Series A Funding:
After seed funding, the startup may look into raising Series A funding. Series A funding is mostly used for the expansion of the business. By this point, a startup likely has a functioning product or service and some employees. When it initiates Series A, a startup will typically offer between 10 and 30 percent of its stock in order to raise additional capital. Before raising capital, entrepreneurs must undergo a Series A evaluation. The market size, risk, income, clientele, the caliber of the team, proof of concept, potential for net profit, and market conditions are crucial evaluation factors. Before Series A, many businesses do not generate a net profit, but most do generate income. Series A investors are more risk-tolerant than conventional private equity firms, despite the importance of revenue and expansion.
Series B Funding:
After experiencing significant growth, a startup may seek series B funding to expand its business, enter new markets, or acquire competitors. Scale is the primary objective of Series B financing, not development. The majority of venture capital firms seek startups that are established, financially secure, and expansion-ready. A startup that obtains Series B funding has already achieved success. However, financial prosperity is not the only indicator of success. Many Series B companies continue to incur net losses. However, they almost always generate revenue, and their use of Series A funding was deemed successful.
Series C Funding:
After Series B, a large number of companies move on to Series C, which, unlike the previous phases, is reserved for profitable startups. These funds are frequently used for M&A transactions and market expansion. The majority of entrepreneurs consider Series C to be the final funding round. Even though it is conceivable, later funding rounds are typically used to help companies prepare for an initial public offering. It is probable that investment banks, hedge funds, and private equity firms will all participate in this round of financing. You have a large customer base, growth, (typically net) revenue, and an exceptional team. Therefore, your evaluation will be based on more specific information. At this juncture, these “visionary” metrics (team expertise, concepts, and R&D aspirations) are less significant. Investors desire access to the accounts so they can determine the company’s value based on earnings.
It is essential to remember that not every startup will go through each stage of funding, and the quantity of funding a startup receives can vary greatly based on its industry and specific needs. When seeking financing from investors, it is essential to have a well-written business plan and an effective presentation.
References:
- Learn about Bootstrapping: https://www.investopedia.com/terms/b/bootstrapping.asp
- Learn about Seed Capital: https://www.investopedia.com/terms/s/seedcapital.asp
- Series A, B, C, D & E: https://www.startups.com/library/expert-advice/series-funding-a-b-c-d-e
- Startup funding explained: https://www.digitalocean.com/resources/article/startup-funding-series-a-b-c#what-is-series-a
- Series funding A, B & C: https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp