There are different stages that each company goes through, with different needs and challenges. But in all of these stages, what remains as a constant struggle is raising capital. Each round of growth is an opportunity for you to meet different players in the business with different mindsets and requirements.
Depending on the purpose of raising capital, there are three stages in a startup funding rounds:
- Pre-Seed / Seed
- Series A, B, C
So you have an initial idea of your business, you found a potential co-founder, and you are bound to make things official through registering your business.
But beyond conceptualizing a name for your business (and making it official), you have to take note of the numerous decisions that you need to make to guarantee that your business is future proof and remains attractive to investors. These are…
- Structure of your incorporation
- Licensing requirements
- Intellectual property
- Pool of candidates for your future employees
The pre-seed round doesn’t end after completing the abovementioned (requirements). There is an ever-increasing competition and growing expectations of your market (no matter what industry you are in) at the start of each startup funding round.
In order to raise seed funding, anticipate that you would need the following:
- An established minimum viable product (MVP)
- A solid core team
- Early traction and impressive reviews from your customers showing the strengths of your business
During the pre-seed phase, your first investors are normally friends and family (or business angels) whose investments usually range from $50,000 – $200,000 (for an equity stake of 5% to 10%). Their investments would give you with sufficient runway to build your MVP. This pre-seed money will then be your vehicle to get to the next round of your startup funding.
For a business to take off, it takes more than just capital to actually develop your preliminary product and prove that your product fits in your chosen market (even after launching your MVP and managing to get your first customers and users).
Raising capital in the seed financing phase is geared towards financing product development and initial market entry (for initial growth and to prove product-market fit). Financing usually comes from family and friends, incubators, investors, and venture capitalists. Normally, investments come in the form of convertibles or equity.
Raising Seed Funding for Startups: The Process
In the process of raising capital, the key to succeed is to make sure that you have a system and process in place, the same way that you need to have a strategic approach when it comes to your sales and marketing funnel. Similar to a traditional sales and marketing funnel for a B2B enterprise business, the fundraising process can be simplified into three steps.
When starting with the fundraising process, it is crucial to identify the right investors for your business and make sure that they fit into the greater vision of your company (you need to convince them how your business can be of benefit to them).
The Right Time to Raise Seed Funding
Approaching investors to raise seed funding should happen whenever you feel like you already have a well-developed product, market, or team (or all of those). You need to prove your investors that your company deserves to be venture-backed meaning you are capable of scaling and growing to the valuations where an investor can make a solid return on your company. Needless to say, company founders need to impress their investors. The fundraising process needs to start whenever you feel that you already have what it takes to create enormous returns for your investors.
Identifying the Amount of Your Seed Funding
As a founder, the amount of the seed funding that you should raise depends on how much you want it to be. The general rule of thumb is that you should raise an amount that should be enough for you to reach profitability until the next “funding milestone” which is normally within 12 to 18 months (or it can be based on your revenue number, user benchmark, etc.).
To get you to the next milestone, you should have a complete understanding of the different functions of your business (understanding the costs costs of acquiring a new customer, keeping them as customers, the engineering and salesperson costs, etc.). For a guide on the different financial modeling, feel free to talk to one of our financial advisors here.
Seed Funding Types for Startups
Here are some of the most common types of seed funding when raising venture capital.
Family and Friends: This is the most common source of seed funding which often follows a comparable approach to the funnel presented earlier but is less likely intensive since the founder probably has a close existing relationship with this group. When asking family and friends to invest in your business, make sure that you make them aware that they are investing in an extremely risky asset class.
Crowdfunding: This is another form of seed funding that is becoming more famous with crowdfunding websites that make it possible for startups to raise equity rounds from individuals (requiring only little check sizes).
Alternative Financing Options: There has been an increase in alternative financing options that sprouted over the last few years as another option to venture capital, each of which are interestingly have their own pros and cons. These firms usually provide early-stage funding, resources, and an association of experienced advisors helping founders make their businesses profitable. Currently, these options are becoming widely available and adapted by companies at every stage of their growth. Some samples of these alternative financing options are Earnest Capital, Pipe, Corl, and Clearbanc.
Incubators: This collaborative program helps entrepreneurs succeed by assisting them in solving the usual problems that they encounter when running a startup by offering workspace, seed funding, coaching, and training. Some incubators provide a small injection of capital, but most of them provide merely resources to aid founders in assisting them take off their business.
Accelerators: Private startup accelerators offer guidance and funding money to startup companies to cover the expenses during the early stages of the business (travel and living expenses for the three-month residency also). The accelerator agreement usually gives accelerators a portion of your company (5% to 10% of the equity in exchange for the guidance and a fairly small amount of funding).
Angel Investors: Just like family and friends, angel investors are a great source of funding for investors. These are people who aim to diversify their investment portfolio and aid startups that fascinate them. They are usually more seasoned professional who understand the risks involved when investing in a startup.
Corporate Seed Funding: This is a newer type of seed funding wherein large corporations partner with a proven venture capital and set out capital across seed-stage companies that match into their own growth plans.
Building Your Pitch Deck
Building Your Pitch Deck
The pitch deck is a tool that founders use in their fundraising process to better tell their stories. Founders leverage on the seed stage pitch deck to tell a compelling story giving their outside stakeholders good reasons to invest their money, time, and resources into the startup.
For a pitch deck to be effective, it must be:
Concise and Compelling: Show all the information your investors need to know in a concise and clear-cut manner. The deck should clearly show your problem and the proposed solution.
Your Intended (or Current) Market: Make your investors understand your market and why you are operating in such, as well as the opportunity to expand and become a large company through seizing a large portion of the market.
Model of Acquisition: You need to show to your investors that you have a scalable and clear way of acquiring new customers.
Financials: Investors are interested in knowing how you perceive the future of your company through metrics and financial models.
Traction: Investors are interested in seeing where your company is at and what you’ve done so far such as the product that you have so far developed and the market or customers that you have attracted.
Choosing the Right Investors for Seed Funding
After defining the ideal investors for your startup, the next step is to look for those investors who fit in your qualifications. You might have investors in mind already (family, friends, or those you have networked with in the past). You may also find investors through using databases that are built by founders for founders.
It’s Time to Build Your Investor List
When building your potential investors list, a helpful way to better assess them (so you tailor your pitch) is to group them according to tiers. The most qualified investors belong to tier 1, followed by tiers 2 and 3. You may also mix your tiers so you won’t miss on any opportunity to present your pitch to all types of investors.
While seed round is the initial capital in a business, the Series A funding is the next leap in the funding lifecycle of a company. As the next round of capital, Series A funding is the preferred stock that is sold to investors (Once a company is founded, stock options are sold to the founders of the company, investors close to them, and angel investors.)
At the point that the company reaches the “Series A” stage, they are most likely on the product-market fit stage. There’s already a firm revenue in place and a plan to scale to be able to bring in more customers and revenue.
A seed round is used to introduce your product or service and how you can seize a market. To scale the product or service (or to penetrate a new market), it is the series A round that is used.
Series A funding gives you the impetus to grow your business. Now you are about the thread on Series B which is all about growth. This phase is when you are expected to grow the company as quickly as possible to deliver at least 100% revenue growth every year. Your investors need to know your capabilities on how to deliver this generated demand and the opportunities that you have for scaling your business further across markets and geographies. The capital that you have on this phase would be used to better grow your team across all major aspects of your business (i.e sales, support, marketing, tech) that would help you further scale up your business and penetrate additional markets.
This stage spells the need to target the right group of investors that would help you prepare for the stock market and/ or a target acquisition that is enticing acquisition target.
This draws most companies to VCs since they are very competent in stimulating aggressive growth. However, there is a new trend of bigger investors who are becoming famous on these rounds. There are mega players in the field such as Tencent Holdings, Naspers, and Softbank, and other hedge funds and private equity firms who engage for the most promising names.
The investment sizes for the Series B phase ranges from $7M to $10M (for normally a 20% to 30% stake).
If you make it to the Series C phase, congratulations, your startup should now be valued above $100m with numerous years of aggressive growth to follow. You are now entering the big league!
At this point, you should start developing a clear plan to the exit with ongoing discussions with your investors and advisors about becoming a successful public company.
To optimize your company at this stage, what you need to do is to aggressively grow in key markets, expand to establish your company as the prevailing player in your industry, and employ mature and experienced leaders that would help you bring your company to the next level.
From a prospective acquisition target, you are now yourself a potential acquirer so be strategic in buyouts or in acquiring several talents. As this is also a very tough funding stage, expect that the rounds go from $50 and above. Anticipate taxing and long due diligence processes involving a lot of parties.
With a wide range of investors interested in your deal, aside from venture capital, you can expect large corporate investors, private equity firms, hedge funds, and financial institutions to be involved in these rounds. Everyone of them is interested to acquire a piece of your company before a potential exit.
With plenty of capital engrossed in high growth startups, it is now becoming more and more enticing to continue raising in private markets while holding up a potential IPO. But, the more startup funding rounds are being added, the more investors are taking part which are similar to the big ticket names that you would look forward to to partake in an IPO. All of them They will have the similar prospects for corporate control and due diligence.
The IPO (initial public offering) stage is sort of your grand finale as you offer shares of a private company to the public (stock market) to raise capital. Doing this would unlock an infinite amount of potential backing.
If considering IPO, you should consider the following:
- Quicker access to more funding: Once you become a successful public company, it’s possible to raise more funding virtually immediately through a rights issue.
- Transparent valuation: This is important so you can simply utilize shares as part of the compensation to the acquire when doing acquisitions. Current and future employees would also be easily compensated in the form of stock grants or options if shares are a transparent currency.
- Liquidity to the current shareholders: Investors and employees can liquidate their shares as part of daily trading to monetize their stakes following the IPO and the succeeding lockup period.
The journey towards having a successful startup involves a lot of funding. The key to keeping the lights on and the momentum going relies on how equipped you are with confidence to take on the right investors at every stage of your startup life.
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