What are the Different Stages of Startup Funding?

Every startup needs adequate funds to transition its innovations into a reality. While we have all heard at some point that Company X is raising Y amount of money through one Startup Funding round or another, not everybody knows about the different rounds of Startup Funding. Now, why is this information important? Well, the answer is simple. The startups of today are the big bangs of the markets of tomorrow. Whether you want to start your own startup journey or invest in promising startups for wealth creation purposes, you must be well-versed in the different stages of startup funding. This helps you keep braised with the health of these companies and understand their market worth. Each Startup Funding Stage tells you something significant about a company’s growth. Now that is valuable information.

To help you understand the Different Stages of Startup Funding, we have elaborated on each Startup Funding round below.

Pre Seed Round

Pre Seed Funding Round is the round in which the founders of a startup trying to give their idea an initial push. At this stage, they often invest their own money. This is a stage where founders of startups have proof of concept or a product/service prototype and some kind of evidence that their product or service is in demand in the market.

The Pre-Seed Funding Stage is followed by the Seed Funding Stage. In the Seed Funding Stage, founders attract angel investors to invest funds in their idea for further research, testing market needs, hiring a team, and starting production. Sometimes Pre Seed Funding Stage and Angel Round of Funding are not two different rounds. Usually, in this round, investors invest smaller amounts in exchange for equity. This is because the company has less or no track record of the costs and risks involved.

It is important to understand that the Pre-Seed Funding Round and Seed Funding Round occur when the company is only launching or at a pre-launch stage. More than often, at this stage, startups are unable to generate large funds to cover all their costs.

Series A Funding Stage

After the Pre-Seed Funding and Seed Funding Stage comes the Series A Funding Round. This stage of startup funding focuses on startups that have a good and reliable customer base, a proven business model and generate decent profits. At the Series A Funding Stage, startups have already formulated a specific plan for ROI growth and projected specific sales for their product or service. This round of funding is usually used for enhancing brand awareness and credibility. It is also used to improve marketing efforts and conquer newer markets.

Venture Capitalists or Angel Investors are typically interested in startups that show real progress and proven data at this stage. They want to see these startups ready to become valuable money-making machines and scale their business to the next level. Often during Series A Funding, a startup issues share options (to founders and employees) in return for funding.

Series B Funding Stage

After Series A Funding Stage comes to the Series B Funding Stage. At this Startup Funding Stage, the startup has already matured. It has a large user base and decent brand equity, a good valuation and lower risk. Series B Funding Round helps startups become enterprises. At this point, mostly Venture Capitalists and Private Equity Investors invest in promising startups.

At this stage, investors shall be expecting to see substantial growth in terms of revenue, product or service success and user base.

Some significant Series B Funding investors are Sequoia Capital, Insight Venture Capitals, and Accel. This Startup Funding Stage is all about scaling up teams and exploring wider and newer markets. Also, the startup is expected to have a good business track record at this stage. Hence the cost of investment shall go higher.

Series C Funding Stage

After Series B Funding Stage comes to the Series C Funding Stage. Moving to this Startup Funding stage implies a more sophisticated level of business expansion. At this stage, the companies are already successful. As one of the last Startup Funding Stages involves funding for creating new products or services and expanding current project capabilities.

At this stage, the company has not only become a proven success in the market, but they also want to make acquisitions of competitors, increase market share and or scale up or develop new products or services. Often, companies get their exit strategies ready to approach IPO seamlessly at the Series C Funding Stage. The companies that seek funding at this stage are valued at more than $100 Million with several years of aggressive growth track record. Usually, high-net-worth Venture Capitalists and corporate-level investors are involved in Series C Funding Rounds. Apart from them, various financial institutions, high-ticket private equity investors and hedge funds participate in this round and are looking to get a piece before the potential exit.

Initial Public Offering (IPO)

An Initial Public Offering (IPO) is the process of making of a private company’s shares available for the public on the country’s stock market for the purpose of raising capital. This helps these companies unlock a large amount of potential funding. An IPO gives access to funding faster to the company. Becoming a successful public company lets you raise additional funds virtually overnight via a rights issue.

Understanding the distinction between the various Startup Funding Stages helps you decipher startup news and analyse entrepreneurial prospects. Various startup profiles differ but usually possess varying maturity levels and risk profiles at each Startup Funding Rounds. Nevertheless, all investors that participate in series A, B, and C funding rounds contribute towards making the ideas of the startups come to life.

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