How Does Startup Funding Work? A Simple Primer to Help You Assess Jobs
You can use where a startup is in their funding to decide whether you’ll feel comfortable working there. Here’s how.
Are you worried about leaving your steady position to work at a new startup?
If you have a family to support or a mountain of student loan debt to pay off, you may raise a few eyebrows trading your 9 to 5 for the unpredictable nature of startup life.
Learning where the startup capital or startup funding is coming from (and if your paychecks will be a guarantee) may ease your fears.
What the Different Types of Startup Funding Mean
You’ll encounter lots of different funding types during your startup screening process.
Data shows the top sources of the $531 billion raised in startup capital during 2016 included[*]:
● $185.5 billion from personal savings and credit
● $60 billion from friends and family
● $22 billion from venture capital
● $20 billion from angel investors
● $14 billion from banks
● $5.1 billion from crowdfunding
How does each of these sources factor into your job search?
Personal savings and credit make up the funding for most new startups.
Founders tap into their piggy banks, increase their lines of credit, and show others they believe in their idea so much they’re willing to back it themselves.
A lack of savings is why more millennials work at startups rather than start them.
But if this is the only source of funding the startup you’re eyeing currently has, expect tight budgets and the possibility of inconsistent, lower paychecks in lieu of equity.
Friends and family investors can be dicey.
While it may be easier for a startup to get this money early on, working there may also mean dealing with the complicated personal dynamics of those invested.
Venture capital is one of the most preferred funding sources for startups in need of a large sum of money to get off the ground.
But since investors from a venture capital firm will be looking for high returns, expect to be pushed to work hard and reach milestones you may not be ready for. This could be ultra stressful.
Angel investors swoop in and give startups anywhere from a few thousand dollars to millions. They may be easier to deal with because founders will be working one-on-one with them rather than with a whole firm.
Crowdfunding. This new source of capital lets consumers and amateur investors fund the ideas they’re most interested in.
Startups will collect money via online sources like social media, Kickstarter, IndieGoGo, etc. and everyone from their friends and family to high-level investors can get in on the ground floor.
Crowdfunding rarely makes up a business’ only type of startup capital but does require teammates well-versed in crowdfunding marketing and management to get right.
Startup accelerators or seed accelerators invest anywhere from tens of thousands of dollars to millions. They also provide support and mentorship opportunities to guide new startups to greatness.
Startup funding goes through several rounds and can be complicated if you’ve never worked in this arena before.
How Startup Funding Rounds Work
Only unicorns take off with just a single investment or loan.
The majority of startups raise money from investors during funding rounds and trade the cash for equity in the company.
Often the same initial investors will continue to fund the subsequent rounds to make sure their piece of the pie remains worthwhile.
Successfully completing each round gives startups the money they need to reach the next milestone, which will then qualify them for the next round of funding.
Founders start with a Seed Round and then may move on to Series A, B, C, D, and (almost never) E.
Startups can spend anywhere from three months to two years between funding rounds.
Here’s what you can expect working in each:
Seed Round
Startups in the Seed Round have 15 or fewer investors “seed” the company with anywhere from $50,000 to $2 million.
The money raised during the Seed Round goes toward building a solid foundation for long-term growth and success. This means budgeted cash for market research, product development, and testing.
It also covers hiring critical team members, one of which may be you.
Expect a startup in this round to have a business plan (i.e., future goals, target audience, objectives, etc.) but not any physical financial facts or consumer data to back it up.
You’ll never know if the idea will become a sustainable business in this round since the product or service may not even exist yet.
This is why jumping in a position for a startup in the Seed Round may be the riskiest. But it can also lead to the greatest rewards.
Certain startups skip this crucial building time in the Seed Round and leap “straight to A” — especially if they need more than the $2 million this round offers to prove their business model works.
Series A
A startup in Series A has a small number of angel investors, hedge funds, private equity firms, or VCs contributing between $2 million and $10 million in exchange for equity known as Series A Preferred shares.
This means the group of investors will be the first to score preferred shares of the startup.
The money raised during Series A helps build the infrastructure for paying customers to fund the rest of the startup.
But higher investment amounts also mean investors expect lightning-fast growth.
You may have to work longer hours and provide constant updates on key performance indicators to prove the funding is helping the company trend towards sustainability.
This type of pressure isn’t right for everyone.
If you like to triple-check your work and need thinking time to figure out workarounds for issues, you may not like working for a startup in this round.
The positives, however, are the chance to scale faster with the extra cash and the increased publicity this round of funding also creates. This could go a long way to establish your expertise in your network or on your resume.
The next round of funding brings a bit more stability.
Series B
Startups in the Series B round have a product that works and know their target audience, erasing many questions about viability.
Companies in this round are usually valued between $30 million and $60 million. Investments in Series B range from $7 million to $15 million.
The goal of this round is expansion.
To build on what’s working, the startup will use their money to grow the team, expand to new markets, scale their website, add inventory, etc.
Since acquisition is typically on the horizon in Series B, it’s one of the least risky times to become a new employee.
Same goes for startups in Series C.
Series C
Funding in this round isn’t so much about building the startup as much as it is about what comes next. Startups are looking to dominate their market share and diversify.
Companies in Series C are valued between $100 million and $120 million and receive an average investment of $25 million to $50 million+ to hire top talent, wipe out their competition, and prepare for a buyout.
While employees may need to field overwhelming demands by huge VC firms and corporate level investors at this point, there’s very little risk.
Most startups finish their funding rounds during Series C and become revenue-generators on their own.
But if the founders want to stay private or need more help expanding before going public with an IPO, they’ll seek out Series D funding.
Series D
Since very few startups reach this point, funding amounts vary widely.
Startups in this scenario may be going through a “down round,” which happens when a startup doesn’t don’t reach all the milestones or expectations set in the previous funding rounds.
This can lower the startup’s value and make it harder for them to attract other investors to participate.
Scrutinize job opportunities in this round very carefully. Companies making it to Series E are even rarer but do exist.
Check Out Startup Jobs In Your Field Now
While you may not find a startup’s funding diary in their job ad, it’s an excellent question for your interview and decision process later.
New grads have nothing to lose applying for work at a startup whereas veteran employees with bills, mortgages, children, and other expenses may get nervous leaving their steady salary to grow a new business.
But if you see the traits you need to work at a startup in yourself, you may be willing to trade a pay cut for equity in a company you believe in.
Now that you know what to keep in mind on the financial side of your potential career switch, bookmark Unicorn Hunt — Europe’s ultimate startup job board with hundreds of new positions posted each month — so your dream gig doesn’t go to someone else.
