Stage 1: Seed funding
Tominey writes: “Seed stage companies have usually developed their first product, and will have a small number of ‘early adopter’ customers or trials, although revenue is often low.”
The seed funding round is all about demonstrating that your startup has a proven track record and the ability to scale quickly and provide a serious return for investors.
Normally, a seed funding round will contain less than 15 investors who’ll gain convertible notes, equity, or a preferred stock option in exchange for their backing.
While a business may have certain aspects unfinished or be still in the development stage when looking to raise seed capital, they will need a minimal viable product to raise seed funding – but not pre-seed funding.
Advantages for startups in the seed funding range from being given more time to fine-tune their business model, more time to find experienced business partners, increased capital for future rounds, and more flexibility to pivot if any drastic changes need to be made.
What you will need: A pitch deck
Stage 2: Early Stage funding (AKA Series A, B, C and beyond)
According to Tominey:
“The early stage funding/series A stage is often when you would point to a company and say it was a ‘fast growing startup’.
By this point, the company has usually grown its annual revenue to a high six or seven figure number in a short period of time, and will be aiming to continue growing revenue fast over the 12-24 months post-investment.
Investments at series A stage are risky but, with significant capital and a working product, investors can still expect strong capital growth if the business does well.”
During early stage funding, investors are typically looking for a market-proven product that will allow you to easily multiply in revenue within 18 months.
Though unusual, some startups will skip seed funding and go straight to the early stage funding or what is also known as a ‘Series A’ phase.
This approach is the rare event in which a venture capital firm will approach the startup first, via an entrepreneur-in-residence. Entrepreneurs-in-residence are experts in a particular industry sector, hired by venture capital firms to perform due diligence on potential deals, and expected to develop and pitch startup ideas to their firms. However, in such an instance, the entrepreneur will be asked to give away quite a large chunk of equity – often bigger than 20%.
Investors will also be more likely to back a business at this stage (even if it didn’t raise seed funding) if the entrepreneur in question has already had a successful large exit with a previous startup – or significant experience and connections within their industry.
Series A, B, and C
Once a business has developed a product, it will need additional capital to ramp up production and sales before it can become self-funding. The business will then need one or more funding rounds, typically denoted incrementally as Series A, Series B, and Series C.
Startups which are at the Series C and beyond stages of funding have all but proven to venture capital firms that they’ll be a long-term success – with original backer’s shares now having increased considerably in value.
What you will need: N/A
Other resources: N/A
Read the full article here