Shubhika Sundriyal
Subscribe to stay ahead with expert insights on ESOPs, smart ownership strategies, and more!
Editor's Note:-Understanding the startup funding cycle can be challenging. The various startup funding stages, from pre-seed to Series A, B, C, and IPO, may seem overwhelming at first glance. In this blog, we aim to simplify each round, guiding you through the startup funding lifecycle with clarity and ease.
Wondering how startup dreams turn into success stories by securing the crucial financial backing needed for growth? It begins with a startup investment lifecycle?
Well, a company begins with the founders investing their own resources, which is called the seed stage. It then advances to the early or growth stage, attracting support from investors and venture capitalists who pump in additional capital to fuel the startup. As the startup progresses, it gains maturity, moving towards two options: launching an Initial Public Offering (IPO) or being acquired by a larger entity.
So yes, this funding lifecycle is all a game of securing financial backing. In this blog, we’ll explore each stage.
Let’s get started!
Source: equitynet
In the news?
“Nutrition Startup Nuvie Raises $450K in Pre-Seed Funding Led by PedalStart”
In the initial stage of fundraising, known as the pre-seed funding round, founders present their business concept to potential investors. Usually, pre-seed investors include friends, family, angel investors, pre-seed venture capitalists, and crowdfunding sources.
Given the absence of financial data at this early phase, investors base their decision primarily on the merit of the idea and the competence of the founding team.
To prepare for pre-seed funding for startups, you need to have a compelling pitch. Develop a detailed business plan, highlighting market potential and competitive advantages. Build a prototype or minimum viable product to validate feasibility. Also, establish a solid team and showcase relevant expertise.
Create a realistic financial model and outline clear milestones. Engage with potential investors, mentors, and advisors to garner insights and support. Be prepared to showcase a scalable business model during investor meetings.
Next up is seed-stage funding.
In the news?
“illumine raises $2.5 Mn seed funding round led by Prime Venture Partners”
The seed funding for startups is where the company’s product takes shape. However, for this, it needs further capital injection to test the market-product fit, develop the product, and bring operations up to speed.
Mike Belsito, in his book, Startup Seed Funding for the Rest of Us: How to Raise $1 Million for Your Startup - Even Outside of Silicon Valley, writes “When we’re considering investing in a startup, we first want to know that the entrepreneur has a clear understanding of the market. Who are the major players? What about this market is ripe for disruption? What is this startup’s unfair advantage to disrupt this market? In the first conversation we have with a company, these are questions that we’re looking for clear answers to.
Break down your market strategy, showcasing the growth potential that lies ahead. Investors want to see a stellar team, so highlight your squad's expertise and passion. Conclude with a call to action, leaving investors eager to be part of your journey.
In the news?
“Oben Electric Closes INR 100 Cr Series A Funding Round” “Fintech startup Aspora secures $53 million in Series B”Series Afunding is an important milestone in the startup investment lifecycle as the capital raised during this phase is earmarked for essential needs such as recruiting top talent, expanding inventory, and acquiring necessary equipment.
To secure Series A funding, you need professional investors with a meaty amount of capital to help you kickstart scalable operations. This is a formal funding round sourced from external parties. Apart from funding injections, these investors also bring expertise and valuable connections to the table. In return for their support, the founders will give a portion of their equity.
Once a business has successfully navigated the initial startup funding stages, establishing a solid customer base and gaining market acceptance, the focus shifts to further expansion. With Series A fueling the initial growth, the startup now sets its sights on Series B funding to take its operations to new heights.
Series B funding will help you in scaling operations across diverse markets and geographies. The increased funding facilitates an acceleration of operations and delivery capabilities. At this stage, the startup can present tangible figures and metrics, showcasing its product/idea's performance to potential investors. With a robust customer base and a stable revenue stream, Series B funding becomes instrumental in providing the necessary boost for sustained growth and market dominance.
In the news?
“Mahaveer Finance India Secures INR 200 Cr in Series C Led by Elevation Capital”
“Financial operations platform Ramp secures $200m in Series E funding”
During the late-stage funding phase, a company seeks substantial capital infusion to push its expansive growth initiatives. This critical financial juncture often coincides with preparations for an Initial Public Offering (IPO) or an acquisition. By this stage, the startup has firmly established its market presence, achieving significant milestones that instill confidence in potential investors.
Who are these late-stage investors and venture capitalists?
These are large corporate investors, financial institutions, private equity firms, investment bankers, and hedge funds.
There is no set limit on the number of funding rounds a startup can go for. This flexibility allows the company to secure additional funding whenever necessary, whether it be for global scaling, the introduction of new products, or the acquisition of a competitor. The subsequent funding rounds, starting from Series D and beyond, serve as avenues for further financial backing to support the startup's strategic objectives.
In the news?
“GPS Renewables’ ARYA raises Rs 100 crore Mezzanine Financing from InCred, Spark Capital”
This is the stage that comes before a company goes public. It’s also called the bridge stage or the pre-public stage as it helps support the company in conducting some major events before it goes ahead with the IPO. What are these major activities pre-IPO? These may include carrying out financial audits and due diligence. It may also include hiring investment bankers to guide them through the upcoming IPO.
In the news?
“Mamata Machinery IPO garners 194.95 times subscription on last day of offer”
“Ventive Hospitality IPO subscribed 9.80 times on Day 3”
An Initial Public Offering (IPO) is a significant milestone for a startup, as it involves making the company's shares accessible for public purchase on the stock exchange. The primary goal is to rapidly secure substantial capital. Simultaneously, it serves as a liquidity event for existing shareholders and investors, allowing them to sell and monetize their shares.
The IPO process involves the company's shares being officially listed on the stock exchange, opening them up for public trading.
In the lead-up to an IPO, meticulous preparation is essential. The company undertakes a rigorous process, assembling a dedicated team of lawyers and accountants to compile financial statements. Additionally, thorough preparation for an audit is conducted as part of the comprehensive groundwork for the IPO.
Now, you might be wondering what if somebody doesn’t want to go for either of these rounds? How do they secure financing? Well, in such cases, they can choose to go for either crowdfunding (no worries of diluting equity here!) or go for the conventional bank loan or other lines of credit (costliers due to high repayment amount).
Understanding the funding game can be challenging. When to go in for the next round of investing? How much to raise? How much equity to dilute at different fundraising stages? Everything poses complex considerations at every turn.
But, don’t worry. With a solid understanding of the fundamentals, you'll be well-equipped to identify the opportune moment for gearing up for the next investment round while enhancing operational efficiency. The crux lies in continuous learning and exploration.
As founders aspiring to scale startups into large enterprises, the key is to maintain focus, adapt to the end-user requirements, and commit to expanding your knowledge base. Also, monitoring competitors and staying attuned to the latest industry developments will help you stay relevant. Hope it helps!
So, stand tall, stay focused, and keep pushing the boundaries of excellence!
Startup funding begins with personal savings or support from close connections. This is called the pre-seed stage. It is followed by Seed funding where the startup raises funds from angel investors. As the business grows, the startup goes for Series A, B, and C rounds in which large amounts are raised from venture capitalists. Lastly, the startup goes though a liquidity event such as an acquisition or IPO.
Pre-seed funding is the first stage of startup funding. Here, entrepreneurs secure initial capital to develop their idea, do market research, and validate its potential. Usually, close friends and family offer support through funding in this round.
Startups raise seed funding by pitching their business idea to investors such as angel investors and venture capitalists. Founders usually present a business plan by doing market analysis and designing a minimum viable product (MVP). In return for funding, investors usually ask for equity in the company.
To prepare for a liquidity event, startups ensure that they adhere to relevant compliances, keep the cap table updated, and follow all due diligience. Also, clear communication is adopted with regard to the company's valuation and growth potential while negotiating with the stakeholders.
An IPO (Initial Public Offering) is a huge milestone for a startup as it allows the startup to go public. This means that the startup can then offer their shares to the general public on the stock exchange. This helps founders, startup investors and other equity holders monetize their ESOPs while raising significant capital for the company.
A cap table (capitalization table) provides a detailed breakdown of a company's ownership structure. The breakdown includes the equity shares and the percentages of the equity holders. This information helps investors and relevant stakeholders get a good grasp of the startup's equity dilution and valuations and is especially useful when going for funding rounds or liquidity events.
Related Content
