With an array of funding options available to startups, founders can sometimes feel overwhelmed and perplexed about the most suitable source for their startup
Understanding the difference between these startup funding rounds will help founders comprehend various sources and evaluate business opportunities
Raising funds from suitable sources enables entrepreneurs to scale their startups effectively at any stage of the entrepreneurial journey
Finance is the lifeblood of every business. A startup needs funding to grow in its business journey from ideation to revenue generation. In recent years, owing to the surge of startups in India, there has been an increase in startup fundraising options. Home to 73,205 startups, India has witnessed an uptrend in startup funding and funding options. Indian startups raised $19 Bn in H1 2022, propelling the startup ecosystem to the third-largest in the world.
With an array of funding options available to startups, founders can sometimes feel overwhelmed and perplexed about the most suitable source for their startup. At a time like this, the source of funding must match the stage of operation of the startup. A deep understanding of financing stages allows founders to identify where their startup is and which potential investors can take them to the next stage.
Pre-Seed Funding: Ideation
This is the earliest stage of startup funding when founders are getting their operations off the ground. At this stage, founders are trying to bring their idea to life. Consequently, minimal and mostly informal funding channels are available. The most common pre-seed funding sources are self-financing, friends and family and business pitching events.
Most founders resort to bootstrapping their startups, which means utilising their savings as there is no external constraint or dilution of control. Additionally, founders also tap into their friends and family network to raise money.
Founders with extraordinary business plans and pitches also try their luck at business pitching events where the host institutes or organisations provide prize money, grants, or financial benefits.
Seed Funding: Validation
The seed stage is analogous to planting a seed and the funding received helps the seed grow into a tree. It is the first equity funding stage wherein investors expect some equity in exchange for funds. During this stage, founders validate their product/service’s potential demand and conduct a proof of concept (POC). Seed funding enables the founders to conduct market tests, onboard mentors, and build a founding team.
Common sources at this stage are incubators, accelerators, angel investors, and crowdfunding platforms. Incubators and accelerators are organisations that nurture entrepreneurs to build their startups by providing essential building blocks. This includes capital, space, utilities, and legal assistance, among others. Founders also reach out to angel investors who invest in high-potential startups for an equity stake. Additionally, there are crowdfunding platforms where entrepreneurs can raise money from a large group of people.
Series A Funding: Early Traction
This is the post-market launch stage when a startup’s products or services are available to the customers. Investors financing at this stage give importance to key performance indicators like customer base, revenue figures, and app downloads, among others. The Series A stage also marks the beginning of venture capital (VC) financing. Funds raised at this stage assists the startup in acquiring new customers, launching new offerings and expanding its geographical footprint.
The most common funding sources are VC companies and super angel investors. VCs manage professional investment portfolios and finance exclusively in high-growth startups. VCs take equity in exchange for their funds and actively participate in the mentorship, management, and planning of the startup. Angel investors also participate in this funding stage but have a diminished influence compared to VCs.
Series B, C & D Funding: Scaling
At this stage, startups enjoy a rapid rate of market growth, a stream of revenue, and market expansion. Series funding sessions are all about taking the business to greater heights. To chart the path to growth and development, startups utilise funds from venture capitalists or private equity firms.
Founders can raise funds from VCs with larger ticket sizes or from a pool of VCs. Although private equity firms refrain from funding startups, some private equity and investment firms have recently been funding fast-growing startups for Series C, D and beyond.
Beyond Series Funding: Exit Options
Once the startup has travelled past the series of funding stages, the following stages represent exit options. This includes options such as mergers and acquisitions, initial public offerings (IPOs), and share sales or buybacks.
It is the collective aim of all startups to go public. Issuing an IPO is synonymous with reaching the pinnacle of success. Only startups with a proven track record of profitability and growth can sell stock to the general public and list on the stock exchange.
Besides launching an IPO, founders may decide to acquire or be acquired by another company. They may also sell the startup or their shares to another company, as well as to venture capitalists or private equity firms. Founders may decide to buy back their own shares from investors in order to regain control of their company.
The Bottomline
Understanding the difference between these startup funding rounds will help founders comprehend various sources and evaluate business opportunities. Raising funds from suitable sources enables entrepreneurs to scale their startups effectively at any stage of the entrepreneurial journey.
