Starting a business or a startup one thing, but growing and expanding it is another. This is often hard for most startups without any funding. Friends and family, angel investors, venture capital, crowdsourcing, debt finance, and grant funding are a few possible sources of startup funding. Often the funders do so in anticipation of higher returns in the future from the startup.
Pre-seed, seed, series A, series B, series C, and IPO capital are the six stages of startup funding. Many startups across Africa and the world at large such as MNT-Halan, TymeBank, Victory Farms have gone through various funding in the recent years from a few thousand to a million dollars and your startup too could be the next one.
Pre-seed funding is the earliest funding that comes before seed funding. Pre-seed funding is raised to show whether a product can satisfy the needs of the target market.
The first source of pre-seed funding is usually bootstrapping and when need arises then other external sources of funding such as from friends, family, angel investors etc. can be explored. The funding from external sources usually ranges from US$25 000 to US$250 000, if not less.
To determine the amount to be raised, a plan is formulated with set targets and how much will be needed to achieve those. Also the startup’s monthly burn rate is also calculated, which basically calculates the amount of money a startup uses per month and at least a 6 month budget should be raised during preseed funding phase.
Raising for too little will not be beneficial to the startup and also trying to raise too much might end up scaring investors. Those who fund your startup during your pre-seed funding phasebecome the first stockholders of your startup together with the co-founders.
Seed funding is the first official equity funding by investors into a startup usually in exchange of equity or as convertible debt. Seed funding is particularly important in financing the company’s early activities such as market research and product development.
It takes its name from the seed, which is planted and has to be nurtured and watered until into grows into a tree. Most startups especially in the tech and fin-tech world are going through seed funding often due to the high costs and capital requirements for their ventures.
How much a startup gets on seed funding is mostly determined by the startup’s valuation which are also determined by the company’s track record, market share, risk level and approach to management. Most investors will be looking for those ventures with good if not high return on investments (ROI).
Series A Funding
As the business grows and matures and also with increasing need for capital, the business can go through series of funding rounds. This allows the business to raise more money for its expansion and it also give chance to other investors to join the business.
Often venture capitalists firms lead the pack and a single investor may act as an anchor for funding. Companies often use equity funding on series funding and there will be few angel investors at this stage.
Series A funding is only after the business has demonstrated a profitable business model and promising business growth and potential.
Series B Funding
Series B fundraising is the second stage of funding, which includes possible investors such as venture capitalists and private equity. When a startup reaches a certain point in its development and functioning, it is ready for Series B funding.
How much can be raised in Series B funding typically depends on a variety of factors such as, the stage of the company, the sector and valuation of the same company. In Series B funding round, the startup usually raises between US$5 million and US$30 million.
Series C Funding
In Series C Funding, the focus is on scaling the company and growing it as quickly and successfully as possible. The investors are looking for somewhere they can invest their capital and reap as much as double their amount back.
Usually Series C Funding typically range between US$100 million and US$120 million and the average time between Series B and Series C funding is 27 months. Businesses that raise funding in Series C round are usually those that have been already successful before and raised money previously in previous rounds.
Initial Public Offering (IPO)
Now coming to this important and mega stage in startup funding where the business gets to sell its securities to the public in the primary market. This is an important step in the growth of a business. The company can go the IPO route as it tries to raise more capital, let early investors cash out among many other reasons too.
The process requires the company to open to public scrutiny, getting its valuation and complying with the regulatory authorities etc. before it can officially list on the stock market.