Stages of Funding

If you are a founder who is going to be raising capital, it is essential to know what stage your company is in. Nearly all startups at some point or another will require external funding. The company stage determines just who is going to be possibly interested in cutting a check. Each stage has its own metrics that various venture capitalists use to determine if the company is mature enough to grow and scale. So, if you too have an idea that you want the market to know about.

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The startup funding rounds have transformed the business landscape completely, over the past few years. Not long ago, the available startup fundraising options were few, but lately, we’ve experienced a surge for startup funding at different stages. As a budding startup owner, you must evaluate where your startup stands and how much funding can you raise from external sources.

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Before we discuss the ins and outs of each funding stage, let’s first know how the funding round works.

How funding round works

The startup funding stages aim to provide the business with the money needed to achieve its next milestones and continue expanding. The funding process typically has the following phases:

• Pre-Seed
• Seed
• Series A
• Series B
• Series C
• Series D and Beyond
  

The specifics of each funding round, such as the company valuation, are typically negotiated before the investment is made. The startup usually issues new shares to investors in exchange for capital in each funding round. As the business shows growth potential and attracts more investors, its valuation grows.

Pre-Seed stage - Idea Finalized !

The pre-seed startup funding stage is defined as the time when a startup is just getting started. This is the earliest stage of startup funding when the founders are trying to get their idea off the ground. The startup owners at this stage need to ensure that their product idea fits the market demand, go through proof of concept, gather an effective core team, and build a minimum viable product.

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Pre-seed funding can be obtained in a short time, though sometimes it can take much longer, depending on the business model and nature of the company. The most common funders at this stage are the founders of the business themselves, their close friends, relatives, and supporters. It is most likely that the investors do not get startup equity in the company in exchange for their investment.

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You have a clear picture of your idea, and you have your product or service ready to penetrate the market. This is what we call the pre-seed stage.

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But what next?

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How to raise pre-seed ?

Validate Your Idea and Build an MVP:

• Market Research
• Minimum Viable Product (MVP)
• Leverage Personal Network and Early Advocates

• Family, Friends, and Personal Savings
• Angel Investors and Advisors by Crafting a Compelling Story and Pitch

• Storytelling

Pre Seed Valuation

Funds raised during the pre-seed round average between $100k-$1 million (depending on whom you ask, this could vary wildly). Because valuing a business at this stage is difficult, founders often use SAFE notes. I have discussed in detail about SAFE in my previous article “How to prepare for fundraising of your startup”.

Seed Stage- Ideation done! Validation next?

Seed funding usually follows pre-seed funding. The main aim of seed funding is to help startups move from the ideation stage to the development stage. It is the first official equity funding stage. It provides the startup with the capital it needs to finance its first steps, such as building products, attracting customers, and generating revenue. Here, the investors receive equity in the startup in exchange for investment. Seed funding is important for startups as it gives the business the support it needs to succeed.

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Seed funding helps cover essential costs like launching a basic version of your product, marketing, hiring your first team members, and doing more market research. However, this stage is risky for investors. To compensate, they usually get a share in your company in exchange for their investment.

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While many startups think getting seed funding is all they need to succeed, it’s just the beginning. Securing funds is crucial, but equally important is ensuring your product meets the market's needs. Without a good product-market fit, even well-funded startups can struggle to grow and succeed.

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How to raise a seed round ?

Raising a seed round is a crucial step for your startup's growth. Seed investors focus heavily on the quality of your team and the promise of your product. They also look at some basic but important numbers to see if your startup is on the right track.

• Retention

First, they check retention to understand how well you keep your customers, which is basically how many customers stick around versus how many leave (known as the churn rate).

• Monthly revenue

They also look at your monthly revenue, which can be measured in different ways depending on your business type – like Monthly Recurring Revenue (MRR) for software companies, Gross Merchandise Value (GMV) for e-commerce and marketplaces, or Gross Transaction Value (GTV) for financial tech companies. Your growth rate is another key metric, which includes both how fast your user base and your revenue are growing. Ideally, a monthly growth rate of around 20% is seen as a good sign.

• Burn rate

Lastly, investors will consider your burn rate, which is how much money you spend each month, and your runway, which is how long your current funds will last. They want to know that the money you’re raising will give you enough time to grow and achieve your next milestones.

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In simple terms, seed investors want to see a strong team and a promising product, backed up by solid numbers showing you can grow quickly and manage your funds wisely.

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Seed stage requirements

At the seed stage of a startup, it's crucial to have a product that's more than just an idea or a basic prototype – it should be a functional version that real users are engaging with, often referred to as a minimum viable product (MVP). By this point, you need to show that your product works and that there's genuine interest and demand for it. This means you should have some level of revenue, growing user numbers, or interest from vendors and businesses. Your core team should be in place, ready to drive the business forward. Above all, you need to clearly explain why your product is the best solution to the problem you're solving. Investors at this stage are looking for evidence of "product-market fit," which means your product meets the needs of the market you're targeting and has the potential for significant growth.

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Seed round valuation

The valuation of a seed stage startup varies. Seed valuations of U.S. based startups range from anywhere from $4-11 million with check sizes varying between $50,000 to $5 million.

Series A Funding - You’re out there ! Market tractions next ?

Series A funding is a crucial step for startups that have moved beyond the initial seed stage and are looking to grow bigger. At this point, your business has shown some success and potential, and you're ready to take it to the next level. This means you need more money to expand your operations, reach more customers, and improve your product. Series A funding is where you typically get this money from investors who believe in your company’s future and want to see it grow. These investors are usually venture capital firms or strategic partners who are looking for promising startups to invest in. To secure Series A funding, you need to show that your startup has a solid plan for growth, a product that meets a market need, and the ability to become profitable. In simple terms, it's like proving to investors that your business is ready to jump from being a small, promising venture to a significant player in your industry.

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Seed A Requirements

Series A funding requires a Series A valuation. The startup has to be properly valued and priced. To reach this valuation, the startup will be scrutinized more than ever before. Analysts will examine the company metrics, size, track record, management, risk and most importantly, the potential for growth. Here is a sample chart for an Enterprise SaaS to help you determine your metrics at this stage.

Series A Valuation

At the Series A funding stage, your startup is usually valued between $10 million and $30 million. This means investors believe your business is worth somewhere in that range. Typically, startups raise about $10 million at this point. Investors are

looking for substantial returns, so they expect your company to grow significantly. Essentially, this funding helps you move from a small-scale operation to a larger, more established business.

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How to raise Series A

When you reach the Series A stage of funding, you're entering a new level of investment. At this point, you're dealing with professional investors who are looking for more structured and detailed deals. The process is called a "priced round," meaning the value of your company is carefully assessed, and the terms can get quite complex.

Investors will dive deep into your business metrics – essentially the numbers that show how well your business is doing. You'll need to get comfortable with terms like ACV (Average Contract Value), LTV (Lifetime Value), and CAC (Customer Acquisition Cost), as these figures become crucial in their decision-making.

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As in this guide we are mainly focussing on stages of funding, we can discuss these terms in depth in our future articles.

Series B,C,D and beyond- From growth to exit

• Series B Funding: By this stage, your startup has a proven product and is generating steady revenue. Series B funds are used to scale your business even further. This might include expanding into new markets, increasing your marketing efforts, or hiring more employees to keep up with demand. It’s like fueling a rocket to reach higher altitudes.
• Series C Funding: If your business is booming and you want to take it to the next level, Series C funding helps you do just that. This round is often about significant growth initiatives like entering international markets, developing new product lines, or acquiring other companies. Think of it as gearing up for a massive expansion to solidify your position in the market.
• Series D Funding: Sometimes, even more funding is needed after Series C, either to continue the growth trajectory or to address unforeseen challenges. Series D can be for further scaling or pivoting strategies if the company needs to adjust its course. It's like adding an extra boost to keep the momentum going or steering the rocket onto a better path.

Planning Exit Avenues ?

Initial Public Offer (IPO)

Now be ready to see your startup go public and be a listed company now wherein the public can buy shares and help you raise more capital for faster scale-up.

How Many Rounds of Funding is Ideal for a Startup?

There is no set number of funding rounds that are ideal for a startup. The funding rounds typically depend on the company’s requirements, goals, and overall financial performance. Some startups may only need one or two funding rounds to meet their goals, while others may require several to scale their operations. The time between each funding round also varies. Some startups may require funding rounds in rapid succession, while others may wait for years between each phase. The ideal funding approach should be based on your startup’s circumstances and ability to secure its funding to achieve its goals.

In a Nutshell

The various startup funding stages allow entrepreneurs to scale their startup at any stage of their entrepreneurial journey. This scaling practice allows them to identify where their startup stands and which potential investors would invest in them in order to help them grow.

Do remember that in order to gain funding, startups must be mature enough to qualify for a specific funding round. You can identify where your startup stands by its net worth.

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Many startup owners retire once after they’ve gone public. Many amongst them also prefer becoming an angel investor themselves and invest their hard earned money into other startups. After all, they’ve certainly earned the right to relax and advise other entrepreneurs on how to grow their startup and make it profitable.

How Agrim Advisors Can Help

At Agrim Advisors, we are committed to providing end-to-end professional consulting solutions for founders and investors. Our services span from company incorporation and fundraising to compliance management, acquisitions, and beyond. If you believe we can assist you, feel free to reach out, and we will connect with you shortly.

Disclaimer

This content is for general informational purposes only and does not constitute professional advice. For specific legal, tax, or financial needs, seek professional guidance. Agrim Advisors assumes no liability for reliance on this information. Note that the content is based on current laws, which may be subject to change.