How Startups Can Start a Funding Round
What You Need to Know About Funding Rounds and How to Go About Starting One
It’s the age of startups, which means that never before have there been so many opportunities for entrepreneurial go-getters to build something from nothing. However, there’s really no such thing as building something from nothing. As anyone foraying into the world of startups knows, building anything requires funds, money, moolah.
Most entrepreneurs don’t have the funds to launch their startups entirely on their own. This is where external funding comes in. If you’re an entrepreneur who is seeking external funding for your incredible business venture, you’ll likely need to launch a funding round.
What Is a Funding Round?
A funding round is a way for startups to secure funding from external investors in return for equity in the company. There are often several rounds of funding — Series A, Series B, etc., depending on what the company wants to accomplish and how much money is needed. Series funding rounds are sometimes preceded by a round of seed funding or even pre-seed funding — the official title usually depends on what stage the company is at.
Requirements for Funding Rounds
Before any round of A, B, or C series funding, the company’s valuation must be determined. Valuation is the economic value of the company at that specific point in time, determined by external analysts who take numerous factors into account. It is essential for a company’s valuation to be determined before a round of funding so that potential investors can know what they’re dealing with.
Additionally, in order to close a round of funding, you must have a term sheet with your investor. A term sheet is presented to a company by an interested investor and it includes the amount and other terms of the investment. In some cases, one investor may be willing to put in all the money. In other cases, the investor will only put in some. In the latter situation, the startup will need to seek more investors, but at least the lead investor will be locked in (and that’s the hardest part).
Now let’s take a look at the different stages of funding.
Pre-seed funding happens before your company is up and running. This is the initial cash that gets the business off the ground and it usually comes from the company’s founders themselves or from close friends or family.
If you’re lucky and your company gets off the ground thanks to your pre-seed funding, you’ll move on to seed funding. Seed funding is still quite preliminary and it’s open to all sorts of investors, including venture capital firms, angel investors, incubators, and of course, more family and friends. Investors at this stage will be doing so in return for equity in the company, and companies can raise anywhere between $10,000 to $2 million dollars in seed funding. For some, that’s enough, and they don’t need to advance to Series A funding.
Series A Funding
Series A Funding is the next step for a business that has developed a reputation in its field and has the numbers to prove it. It’s not just about the idea at this point. It’s about being able to monetize it in a scalable, sustainable manner. Companies that have this kind of business plan are in good shape to launch a Series A round of funding.
In Series A funding, companies can expect to raise anywhere from $2 million to $15 million, though in today’s exciting world of startups there are some that have raised much more. At this point, funding usually comes from venture capital firms.
Series B Funding
Again, if you’re lucky, you may get to the Series B round of funding, which is another round meant to take your company even further than its current successful status. At the Series B stage, the idea and business model are solid. The issue is now keeping up with consumer demand. Series B is not for lightweights. Companies that attempt a Series B round of funding usually have a valuation ranging between $30 million and $60 million.
Series C and Beyond
When you get to Series C funding, you know you’ve made it. Your business is already very successful and now you’re looking for additional funding to help develop new products, reach new markets, or acquire other companies. Investors at this point will be hedge funds, private equity firms, and investment banks, since you’ve proven yourself already and now pose much less risk than you did before.
While you can technically advance to Series D and Series E rounds of funding, many companies that reach Series C have what they need (hundreds of millions of dollars) to launch an IPO, an initial public offering. An IPO is when an investment bank buys a certain number of shares of your company and then sells them to individuals on the stock market. If you dream big in business, you dream of an IPO.
Never Rest on Your Laurels
Entrepreneurs should remember that just because they may have a successful round of Series A, B, or C funding, or even an IPO, nothing is a given. If you follow the news, you know that highly anticipated IPOs — like WeWork, Peloton, Uber, and Lyft — have flopped. On the other hand, there have been plenty of successful IPOs, like Zoom Video, Beyond Meat, and Crowdstrike. No matter what round of funding your company is at, never accept anything as a given. Keep on working as if the future of your company depends on it. Because it likely does.