A simple guide to the funding stages of a start-up business
Are you a startup founder who is looking for the best way to finance your venture? While it's certainly not easy, there are plenty of options available - from personal or family and friend capital, customer revenue and debt financing to venture capital. And let’s not forget all those funding rounds that can help kickstart (or turbocharge!) your business growth: Seed round... Series A ...Series B and Series C… understanding which stage is right for you can be complicated but essential if you want to make sure everything falls into place!
The different funding stages of a start-up
| Funding Round | Typical Investment level | Investor Types |
|---|---|---|
| Pre-seed | Up to 100K | Owner, family & friends |
| Seed | 1-3M | Owner, family & friends, Angel investor |
| Series A | 4-10M | Accelerators, Super Angel Investors, Micro Venture Capitalists |
| Series B | 10-20M | Venture Capitalists |
| Series C | 30-50M | Late stage VCs, private equity, banks |
| IPO | 50-500M | General public |
Pre-Seed funding
Pre-seed funding is sometimes also known as bootstrapping. This funding generally comes from the business owner’s personal resources whilst they attempt to get the company off the ground. The funding is often used for proof-of-concept work, developing prototypes and market research. This is likely to be the cheapest and quickest way to get funding from people who believe in you and your goals but that doesn’t mean it isn’t still a business transaction. Anyone investing in you at this stage should receive interest on the money they lend you and be kept informed of your progress against targets.
Seed funding
The first official stage of the funding stages of a start-up is called seed funding. At this stage, the owner and family and friends may also still be funding the business, but more capital is required, so angel investors are a good option. An angel investor is usually a high-net-worth individual who provides funding in exchange for part-ownership. Investing in a start-up is risky and angel investors tend to require a reasonable equity stake in the business.
Series A
This is the first round of venture capital funding. Usually, at this stage, the business has a team in place and the initial product development is complete. Series A funding may come from Super Angel investors who have higher amounts to invest but it is much more likely to come from early-stage venture capital trusts who are able to raise more significant sums. Series A funding can often produce sufficient capital to help the start-up trade for 6-18 months.
Series B
This funding stage for start-ups is often when the largest growth occurs. The product/service is now scaled for a much wider market and the company is outperforming its niche competitors and building high-quality teams. Start-ups that reach Series B funding are already more successful than most other start-ups and as the company will have a proven business model, the investment is less risky than Series A. Consequently, it is easier to raise larger sums of funding more quickly. Start-ups can raise up to $20M in Series B funding and some of this may come from its previous Series A investors as well as new partnerships with other venture capitalists.
Series C
Series C funding is for companies that have a proven business model and who need more capital for expansion. Series C investors will often be entrepreneurs and individuals who have already invested in the company in the past. It makes sense to ask your Angel investors, Series A & B investors to continue investing with you as they will have already built up the relationship and trust. Series C funding may require input from banks and other larger financial institutions rather than individuals and smaller VCs.
IPO (Initial Public Offering)
The Initial Public Offering isn’t technically a funding stage of start-ups since the company is now likely to be a fully established going concern at this point, but we have included it for completeness. Companies that are looking to go public via IPO generally have a valuation in excess of $100M. The IPO may be the first point at which earlier investors stand to reap the rewards of their investment. Investors may also exit via a merger/acquisition.
Getting support
If you have a new venture and need more information about the funding stages for a start-up, get in touch with David Masih our client relationship partner. David can help you explore your options during a no obligation chat today. Call 03330 067 123 or email info@onthegoaccountants.co.uk.
