Startup funding is a crucial part of life in early-stage, high-growth businesses.
More capital than ever before is becoming available to entrepreneurs, but this means founders can expect the fundraising process to be more complex than ever before. Understanding how a funding round works and how it parlays into the next round can make all the difference in executing on vision and building a successful business.
In this article, you’ll learn about the startup fundraising process, the five common funding rounds, and strategic fundraising principles.
How Does Startup Funding Work?
The startup fundraising process commonly begins with the following steps:
- Do your market research. Investors evaluate a company’s strategic value in terms of how it fits into a specific market. Founders are often very product-focused, but if they don’t look outside their four walls and consider how they fit into the broader competitive landscape, they will miss out on what customers want and what other companies are doing about it.
- Research potential investors. Every investment firm has its own thesis on what to look for in a startup. Some firms focus on a particular industry or technology, while others only invest at a certain stage in the startup lifecycle. It’s important to know this information before pitching.
- Create a winning pitch deck and refine your presentation. The key to startup funding pitch success is mastering the art of storytelling. Investors are of course looking for a return on their investment, so you’ll need to explain how their capital will drive your growth and generate a profit. But a compelling narrative about your intended use of proceeds will go a long way toward building trust and helping them visualize their ROI.
Funding Rounds, Explained
Each startup funding round usually targets a different type of investor, for different amounts of capital. Investors will have differing expectations of entrepreneurs and their startups at each stage. While there are always exceptions, these rounds often come 12 to 18 months apart.
There isn’t much in the way of institutional capital available at the pre-seed stage. There may be grants and competitions to win, which can provide anywhere from $10,000 to more than $150,000 in early funding, but most of the money at this stage will come from family and friends.
Push your circle out enough and you will find people who have the ability and interest in investing. Just always be mindful of who you give equity to and how much you give up at this particular point.
The seed round is the point where your startup’s funding begins to become more formal.
Seed investors tend to be angel investors and larger seed venture capital firms that normally have under management up to $50 million in capital. Larger amounts of equity can change hands at this point.
Entrepreneurs may still be largely pitching on an idea at this stage, but some may be further along. Seed funds are often used for further research, testing product-market fit, making key hires, and accelerating product development.
By the time you hold a seed funding round, your concept should be ready to go.
Series A is where the fundraising really starts to get going.
You’ve made good use of the money you’ve already raised. You have some proof that your offering is working and there is good demand and feedback. You have data that potential investors can look at, track and evaluate.
The money raised in this round will help you optimize, polish and systemize. A wide variety of investors can participate in this stage. They may include angel groups and private equity and corporate venture firms.
Your startup is on solid ground, with product-market fit and a proven product or service, if you are ready to raise a Series B round.
Only about half of all startups make it long enough to raise a Series B. Those that do have real data that investors can make a decision on, with at least tens of millions of dollars in this round. Money raised at this stage will be used to scale and expand on everything you are doing right. You may be moving into new geographic regions, making new hires to handle higher volumes of business, and improving processes for the next stage of growth.
Your investors at this stage will already see some type of path to an exit. Notable venture capital funds are going to be among the main participants in this round.
Series C and beyond
By this stage, your business works, and the reality of a big win is on the horizon. Investors at this stage are going to be among the largest venture capital funds, private equity firms, and corporations. They are going to be among the most demanding you’ve met yet.
The new money will be used to make giant moves to dominate the market, expand to new areas and even eat up other companies through strategic mergers and acquisitions.
Series D and Series E funding rounds sometimes take place, but they are far less common. By this stage, if your business is successful, it should be well established, and raising finance in this way is usually not necessary.
What’s Best for Business
If all you have is a good idea, pre-seed funding is the way to cover those initial setup costs, proof of concept, and hiring a team to bring your concept to fruition.
Jumping straight to Series A funding is a big commitment. The money involved is larger, and investors will expect more return in the short term. Let your business valuation guide you, and make the most of any expertise from experienced investors who can help to build your business so that everybody’s equity rises in value.
Every investor will have a different definition of “investment”. At York IE, we believe to successfully help with startup funding, we need to invest more than money. We need to invest time, resources, and knowledge at all stages.
We’re not investing for fast exits. We’re investing to build sustainable companies and generational wealth. And wealth is about more than money. It’s about legacy.