Learn which type of “Startup Funding” You Could Get !!

• 22 August 2020 | 1670 Views | By Mint2Save

Funding is one of the most critical needs for startups to develop their products or services and expand their business. Every business has distinctive needs and no financial solution is one size fits all. Funding the business is one of the first and the most important financial choice most business owners make. How they choose to fund their business could affect how they structure and run the business. Startup funding is the money needed to launch a new business. These funds can be sourced from various sources and can be used for any purpose that benefits the startup to go from idea to actual business. Once you know how much startup funding you’ll need, it’s time to figure out how you’ll get it.

What are the funding rounds?

Startups don’t just raise lump sum money or randomly get a startup business loan and then are set up forever. But, the number of times startups are turning back to the market to raise more capital has been growing ever since. Each of these raises is known as a ‘funding round’, or we can say a funding round is anytime money is raised from one or more investors for the business.

In each funding round, the founders are willing to trade equity in their company for the capital they can use for the business. Convertible notes are also frequently used in earlier series of fundraising. During those times investors face more risk or in the event founders need a bridge round to extend their existing runway to get to the next financing round they may take the help of such convertible notes.

What are the different types of series funding?

Each funding round is given a letter, such as A Round, B Round, C Round, etc. because each round follows another. These letters categorize which number of funding rounds the startups are on. There are other types of funding rounds available to startups, depending upon the industry they work in and the level of interest among potential investors. Startups also do engage in what is known as “seed” funding or “angel investor” funding at the outset. After this, the funding rounds can be followed by Series A, B, and C rounds. But before any round of funding begins, the analysts undertake the valuation work of the company in question. These valuations are derived from many different factors like management, their proven track record, the market size, and the risk involved. 

What is the correct funding life cycle of a startup?

How long do funding rounds last?

All funding rounds duration is subjective, but mostly the rounds last anytime from 6 months to 18 months. Once any funding round has been completed, the company will usually have working capital for 6 months to 18 months. Thus it is believed that from thereon, the company may either be able to move to market or may instead progress to another series of funding.

What is Seed funding, Series A and B funding? 

Seed funding:

Seed funding is often referred to as the first official equity funding stage. It exemplifies the first formal money that the startup raises. Some startups are unable to succeed to go beyond seed funding into Series A rounds or further. The term “seed” funding gets its name from nature, as the first step towards planting a tree starts from the seed, similarly, early financial support to a startup is ideally the “seed” which will help it to grow the business. At this stage, a startup is fundamentally an idea and will have little or no revenue. This is the stage where a product and a market strategy are being built and developed. Seed funding aids a startup to finance its first steps in areas like market research and product development.  

Series A funding:

Many times, seed startups have great ideas that generate a substantial amount of enthusiastic users, but the company doesn’t know how it will monetize the business. Making it to this stage typically requires having gained some proof of concept. In this round, it’s imperative to have a well worked-out plan for developing a business model that will yield long-term profit. In Series A funding, investors are not just in the lookout for great ideas but also a strong strategy for turning that idea into a successful, money-making business. Series A investors usually venture capitalists or angels. It is increasingly common for companies to use equity crowdfunding in order to generate capital as part of a Series A funding round.

Series B funding:

Once a business has been launched and established and proven its worth in the eyes of the investors, it may need to acquire Series B funding to further grow the business. A startup will only obtain Series B funding after it has started its operations and proven its business model to the investors. Series B funding is normally less risky than Series A funding, and thus there are generally more interested and serious investors.

What is a Series D funding?

Series D is a bit more complicated than the previous funding rounds as many companies finish raising capital during Series C funding. Series D round stage is normally used for financing a unique situation, such as a merger or acquisition, and so is not useful in the normal venture capital financing progression. Not many startups find a need to go to this stage. Also, if the startup was unable to accomplish its growth landmark with series C funds, then it will find a need to get more funds through series D funding to keep afloat.

What are the different stages of startup funding?

The different and evolving needs at each stage of funding can be classified into five stages as outlined below:

Stage 1: Seed capital:

As mentioned earlier, it is the earliest source of investment for the startup. The aim of raising money at this stage is for research and development for an initial product.

Read about Startup Accelerators: Looking for the best funding for your Startup?

Stage 2: Angel Investor Funding:

As the startup’s needs evolve and when more funds are needed either to scale or increase funding toward product development, marketing, or any other purpose, startups look for angel investors. This is the Series A funding as mentioned earlier.

Stage 3: Venture Capital Financing:

At this stage, the startup is either profitable or indicating future profit prospects, and with this new wave of investment, the business will continue to grow. Venture Capital Financing offers resources to scale the business to new business stations, new customer sections, or to upsurge marketing efforts for additional customer acquisition. Multiple rounds of funding at this stage may happen (also referred to as Series B and C funding stages).

Stage 4: Mezzanine Financing & Bridge Loans:

At this stage, the startup is growing and looking to scale significantly with a commercially available product. The funds raised at this point will be utilized toward expansion to new markets or mergers, and acquisitions, or preparing for an IPO. Most startups might even skip this stage (Series D funding) and move to the next stage that is the IPO stage.

Stage 5: IPO (Initial Public Offering):

This is usually the last but not the end goal for all startups. However, if startups have raised money through each of the preceding stages, going public is an option to expand further. With an IPO, the investment bankers commit to selling a definite amount of shares for a certain amount of money, thus raising the required money for the startup. These shares are traded on the stock exchange.

Bottom line on Startup Funding

Startup funding is a critical element for the business venture and is a big issue to tackle. There are many prospective sources of startup capital and there’s a lot of money involved, thus it’s important for each founder to determine which type of funding is best suited and are in alignment with their company’s goals. Understanding the difference between each round of raising capital will help the startup decipher and evaluate entrepreneurial prospects. All the different rounds of funding fundamentally operate in the same basic manner, that is, the investors offer cash in return for an equity stake in the startup. Between each round, the investors evaluate and make slightly different demands on the startup. The company profiles differ with each case study but generally possess different risk profiles and maturity levels at each funding stage.

Check out article on FinTech Hive @ DIFC: Best platform that connects FinTech startups to know about startup incubation