Building a startup is a difficult task. Not only are you focusing on building your new product or service offering, but you are likely spending a lot of time thinking about how you can attract capital to your business.
Most people invest their own money or that of family or friends when they launch a startup, or you might consider financing. There’s also customer revenue if your business has been running a little while, crowdfunding, or venture capital, which is most people’s ideal scenario. That doesn’t mean it is the best solution. Lots of startup business owners view gaining venture capital as some sort of validation. If someone else is willing to invest in your business, you must have a good idea, right?
But there are a number of other stages and options you should consider first, especially if you are brand new.
Pre-seed funding
Pre-seed funding is relatively new and is generally the first round of capital a startup will raise. This round of funding usually allows startups to find a product-market fit, hire new talent, and test new models. Basically, pre-seed funding gives you the opportunity to make sure your startup has the potential you think it has, and will make it easier to apply for further funding in the future, because you will have the data you need to back up your idea.
Pre-seed funding is usually anything from £50,000 up to £5 million. They’re usually angel investors (those who can write you a big check), accelerator programmes, or dedicated venture capitalist funds.
Seed funding
Raising seed funding is a really big achievement. That’s because it is difficult. The first point of call here is to re approach your pre-seed investors for an initial surge of capital into the business. At this stage, most startups will have little to no revenue, so you shouldn’t feel self-conscious about that.
This stage of funding used to be relatively small on average, but has now increased to around $6 million.
There are three common outcomes of seed funding you should be aware of. The first is that the startup is discovered to be unscalable and goes defunct. The second is that you generate enough revenue from the seed funding that you can carry on growing the business based on customer revenue and financing. The last option is that you need to raise further funds. There are several ways of doing this.
- Series A funding: Series A funding is the selling of stock to investors. It allows investors to get in early with a business that they believe in. Once stock is sold to company founders, people close to them, and angel investors, offering stock for sale to other investors is a great way to raise money.
- Series B funding: Series B funding requires a business to commission a valuation and then sell its equity at the valuation that is settled upon. If you reach this stage, you’re doing better than most startups that don’t get past the initial pre-seed stage.
- Series C funding is for businesses that have proven their idea works and need to expand. It is likely that your Series C funders have already invested in your business at some other stage. Try your angel investors, Series A and Series B investors first here. You will already be established and growing, so attracting funding will be easier by this point.
- Series D funding: this is a later stage of funding and is likely to happen when a company could not raise enough money for its Series D funding stage. This might occur as a result of a lower valuation because a company did not raise the capital it needed to meet its targets in Series C. Series D funding is usually required when a company is facing challenges and it could be the only way for the startup to survive. Beware. Applying for this stage of funding might shake future investor faith.
- Series E funding: By the time you reach Series E funding, you’re in trouble. Very few companies survive this funding level. You’ll need Series E funding if your company can’t make up its own capital and the business is struggling to remain active and private.
- Series F & G funding: It is highly unlikely you will make it to this level of funding, but it is possible that you are just managing to stay afloat.
We hope very much that your new startup won’t ever see the later stages of funding, and that you will stick firmly to categories A – C.
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