Different Stages of Startup Financing
Startup financing occurs in multiple stages, and startup founders should not expect to obtain all the funding they need up front. Indeed, many startups must go through multiple “seed rounds” before they can even move on to the next stage of financing. There is no specific number of financing rounds a startup must have—it depends on the nature of the startup and how one defines the various funding stages and options. Generally speaking, there can be anywhere from five to eight stages or rounds of funding (though sometimes more, and sometimes zero).
As you plan to create a startup and move forward, it is important to clearly understand the different stages or rounds of startup financing and what to expect at each one. Consider the following information from our startup attorneys.
Pre-Seed Stage of Funding
For most startups that take outside money, the first stage is pre-seed funding. This is the earliest stage of funding that is used to support research that can allow you to determine whether your startup plan is viable, what type of business structure is best suited to your plans, and what level of financing you are likely to need as you move forward with the process of developing a product and growing your company rapidly. Often, pre-seed funding comes from the startup founder’s own funds or from a friend or family member.
Seed Funding
The next stage is seed funding, and sometimes this round of funding can actually go through multiple rounds. This is a very early stage of financing, according to UNESCO, that provides “capital to transform ideas or early prototypes into viable products or services.” In addition, it is typically the first formal round of funding in which startup founders may seek equity financing from investors or debt financing through lenders.
Priced Rounds
The robust center of the bell-curve for financing rounds (in deal count, not total value) are the priced rounds. This is where the traditional VCs play – Series A, Series B, etc. Though these rules are broken all of the time, a Series A financing round tends to signal real traction, product-market fit and established revenue for a company that is ready to scale. During this early stage (or early stages), commercial operations expand, and the startup begins high-growth and scaling. Through Series A and Series B funding, the business becomes a reality.
Late Stage Funding
Late-stage financing typically includes Series C rounds and beyond. Often the lines between investment and purchase begin to blur as private equity enters the scene, often completing majority investments and taking control. It depends on the startup’s total revenue goals, but during late-stage funding (or growth stage), the aim is to grow a successful company rapidly and expand into new markets.
IPO or Acquisition
Finally, the “exit” stage typically involves either having the startup acquired by a larger company with a substantial offer (more common), or moving forward with an initial public offering (IPO) and taking the startup public (less common).
Map Your Financing Across Every Stage
Do you have questions about financing and raising capital for your startup? Whether you have overarching questions about the process or you want to consider financing options during a particular round of funding, it is important to seek legal advice from an attorney who has experience working directly with startups and handling matters specific to startup businesses. One of the startup attorneys at Triumph Law can assist you. Contact our firm today to learn more about the services we provide to startups, and to entrepreneurs and founders who are considering new ventures.
Source:
unesco.org/en/dtc-finance-toolkit-factsheets/seed-funding