Funds are the fuel that runs businesses; without it, companies are like cars stranded on the side of the road—immobilized and unable to move forward. Therefore, it is essential to raise funds to keep your startup afloat as well as boost growth.
That is why lack of funds is the second most common reason for startup failure—29% says research. So, if you don’t want to be a part of this 29%, you
need to understand the startup funding stages, from pre-seed funding to the IPO process. In this blog, we will discuss the startup funding process and all the stages of raising funds for entrepreneurs. By the end of this blog, you’ll be able to understand all the stages and likely create a rough outline for raising funds for your startup.
What is a Startup Funding Process?
Startup funding is a process of raising funds for your startup, converting an idea into a promising business, and raising public funds for successful
operations. It is crucial for the survival of the startup in this highly competitive world. Individual investors, such as angel investors, and funding institutions, such as venture capital firms, can both contribute funds. Rather than just raising funds, the timing of raising startup funds is crucial for
startup success. Raising them too early can lead to a lack of funds at a crucial time. On the other hand, if you are late, you will most certainly lose your
valuation and only raise a small quantity of capital. Worry not; we will go over each of these steps to help you understand when and how to raise the
necessary funding from investors.
What are the Startup Funding Stages?
There is a hierarchical order in which startups raise their funds. It affects the systematic growth of startups. Remember, this order is not universal;
depending on their growth, they can skip certain steps.
1. Pre-seed Funding
Objective: To raise funds and validate the startup idea, conduct the primary market research, and develop the prototype.
Pre-seed funding is for when a startup doesn’t have a structured form. An entrepreneur has an innovative idea. However, research is necessary to create a tangible business out of that idea. The process of researching to know if the startup idea is achievable or not is called validating the startup. The startup uses this funding to conduct primary and thorough market research and create a prototype of its product/services.
Ideally, the pre-seed funding comes in the form of bootstrapping from entrepreneurs’ savings or from friends and family. However, in many cases,
early-stage angel investors might offer the pre-seed funds. If you are opting for external funding, your equity dilution mustn’t exceed 15%.
2. Seed Funding
Objective: To test the market traction by hiring the core team and developing a Minimum Viable Product (MVP).
Seed funding is considered the first ideal external investment a startup needs to raise. As the name suggests, seed funding is raised after a startup has done enough research to build a product and test its market for traction. The funds ‘nurture’ the startup idea by testing it out in the real market.
Angel investors are often a source of seed funding, as they are willing to risk their capital and invest in innovative ideas. Furthermore, early-stage venture capital firms also offer seed funding for startup growth. Crowdfunding can also be considered for fundraising. The ideal equity dilution rate is 10 to 20%.
3. Early-stage Funding
Objective: To refine the product-market fit with R&D and expand the team.
Entrepreneurs usually use early-stage funding to boost market research, form a strong product-market fit to validate their idea, and get traction from the target audience.
Here, they can earn revenue from the product they test out. Angel investors and early-stage VCs are the primary providers of early-stage funding and guidance to entrepreneurs for startup growth. Startup events like the Global Startup Summit by 21By72 offer a stage for early-stage startups to present their ideas and raise early-stage funds.
4. Series A Funding
Objective: To grow market presence and target the target customer segment for initial market traction.
When a startup has a clear validation of their idea and shows potential with its initial market success, they can move on to Series A funding. It is used to scale operations and help target the customer segments to build a brand presence. Furthermore, these funds can also optimize the startup operations to meet the market needs. Venture capital and corporate funds are popular sources of Series A funding. The equity dilution could be anywhere between 15 to 25%.
5. Series B Funding
Objective: To expand its offerings and target customers to grow by scaling its operations and hiring skilled team members.
Startups that have established themselves in the market and passed the developmental stages look for Series B funding. Here, the focus is on expanding their operations and reaching the target audience. Venture capital funding and more investment from existing investors can help the startup grow. The equity dilution can go up to 15%.
6. Series C Funding
Objective: To expand their target markets and reach a global target audience by developing product lines and acquisitions.
When the startup has established itself in the local market, it raises Series C funding to expand its target audience and enter the global market. The goal is to dominate the market by diversifying the product line and entering the global market through solo branding, partnering, or acquiring a local brand. Late-stage venture capital for startups or private equity investors helps the startup grow. The equity dilution ranges between 10 to 15%.
7. Mezzanine Financing/bridge Funding
Objective: To keep the operations of the startup afloat before raising major funds.
When a startup is getting ready to raise significant capital, it needs some filler funds to keep itself afloat, known as the mezzanine or bridge funds. Startups raise them to keep the operations going and get support in boosting their valuation for the next round. Venture capital funding and private equity investors are primary sources of bridge funding.
8. IPO Funding
Objective: To expand the business, fund the growth strategies, and liquidate the funds of early investors and founders.
When a startup has finally established itself and would like to attract large capital, it converts from a private to a public company through an Initial Public Offering (IPO). This allows them to raise significant and long-term capital, helping the founders and early investors monetize their shares by offering them to the public.
Conclusion
Funding is crucial for the growth of a startup and keeping the business afloat. Therefore, understanding the startup funding stages is essential for
entrepreneurs to know when and what funding will help them boost startup growth. So, we discussed the various funding stages from pre-seed to IPO,
including their objectives and the sources.
Pre-seed, seed, early-stage, and series A rounds are designed to help startups turn their ideas into viable businesses through product development, R&D, and market research. Series B, C, bridge investment, and IPOs are all aimed at extending the startup into new and foreign markets. An ecosystem with angel investors, venture capital funding firms, and private equity investors is ideal for startup growth. Global Startup Summit by 21By72 helps you explore the Indian startup ecosystem and get fundraising opportunities. Explore our website for more.
FAQs
1. What are the stages of startup financing entrepreneurs must know?
The startup goes through various funding stages based on its growth and operation needs. It starts with pre-seed funding, where founders validate their ideas. Next is seed funding, which is focused on building a Minimum Viable Product (MVP). Early-stage funding, like Series A, scales operations, while Series B and Series C fuel expansion and market dominance. Mezzanine/bridge financing acts as a transitional phase before the startup reaches the final stage: the IPO, where it becomes a publicly traded company.
2. What’s the difference between pre-seed and seed funding?
Pre-seed funding is the initial stage where entrepreneurs validate their ideas, build prototypes, and conduct market research. This funding is often sourced from personal savings, friends, family, or angel investors. Seed funding, on the other hand, is a formalized funding stage aimed at developing a Minimum Viable Product (MVP), testing the market, and establishing a core team. Seed funding involves external investors, such as venture capitalists or seed funds. While pre-seed funding is about validating startup ideas, seed funding focuses on preparing for market entry.
3. What’s the role of venture capital for startups?
Venture capital plays a pivotal role in scaling startups beyond the early stages. These investors provide funding during Series A, B, and C, enabling startups to grow their operations, enter new markets, and establish a strong brand presence. Beyond financial backing, venture capitalists offer mentorship, strategic advice, and valuable industry connections. Their expertise helps startups tackle challenges, attract future investments, and provide credibility. For startups, partnering with the right venture capital firm can be instrumental in achieving long-term success and competitive advantage.
4. When should a startup prepare for an IPO?
A startup should prepare for an IPO (Initial Public Offering) when it has a strong market position, steady revenue, and proven scalability. Ideally, the company should show consistent profitability or robust growth potential, making it attractive to public investors. The preparation process includes financial audits, regulatory compliance, and hiring investment banks to manage the IPO. Timing also matters; launching an IPO during favorable market conditions can maximize returns. For startups, an IPO is a critical step to raise significant capital, provide liquidity to early investors, and enhance brand visibility.
