Startup funding explained: from seed to IPO

Have you got an awesome business idea? Have you planned everything about this venture? Have you thought about the funding? If not, then surely you are at the right place, here I will guide you through the funding process of a business. I will let you know about each and every step of this journey; from Seed to IPO. So stick with me to know the things in detail.

Importance of funding in a startup

Investment rounds are an essential part of the startup investment journey. The promise of easy and fast money from investors to build big businesses has inspired countless entrepreneurs to turn their visions into reality.

You can never set up a business just by an awesome idea. There are many more things that matter simultaneously and these play a crucial role in making your startup successful. Funding is probably the most important one among these factors.

Without proper funding, you can never dream to set up a big business. From setting up the company’s first banner to selling products, it requires money everywhere. Until and unless your financial part is strong enough you won’t be able to make your business run properly.

You can have a strong financial part in two ways — either you have a huge capital stock or you get external funding. Formation of a strong capital stock before the startup is no doubt a good idea but you never know how much you are going to need. Having a strong capital stock is not that easy hence you are left with the second option i.e. external funding.

Get on to Google and search for all the successful entrepreneurs and you will find that they were able to lead their business with the support of external funding. You have to make sure that there arises no shortage of money while you are setting up your business and this is only possible if you get enough external funding.

Let us understand the stages of external funding to a startup –

1. Pre-seed Funding stage

This is the first stage of your startup funding which is also known as Bootstrapping and it starts to happen so early that you might not always feel that it is a startup funding.

You have the idea, you want to execute it. The funding that you get on this stage is basically to get the operations off the ground. It’s never easy to manipulate investors to fund your business in the starting phase. But this solely depends on the nature of your business.

Mostly, in this stage, you use your existing resource to give that initial pump to your startup. Many entrepreneurs get a second job at this stage to use their side income to fund their business. Family members and friends are the major fund provider at this stage.

2. Seed Funding Stage

Now is the time to actually provide appropriate water to the seed so that it can flourish. About 29 percent of the businesses collapse at this stage because they run out of capital stock.

You need to ensure that you are providing equity to the investors against their seed funding since they are also taking a risk by investing in your business. Since this is an initial stage of your business, nobody knows how this will work so it is hard to get appropriate funding but you should keep trying.

3. Series A funding stage

By now the company must have started producing products or delivering services depending on the type of business, and strengthening the customer base. It is time to raise the funding. This round raises approximately from $2 million to $10 million.

Now investors investing into your business not only want a great business idea but also a strategy that will transform this startup into a money-making business. Firms going for this stage of funding must be valued at up to $15 million.

Equity crowd-funding is also common at series A funding stage.

4. Series B funding stage

This stage is much similar to the previous one. The development stage is over and it is the time to take your business to the next level. By now you must have won the trust of investors and they would help you to scale through the market.

The estimated capital raise during this stage is $7 million to $50 million and the company valuation must be around $30 million to $100 million.

5. Series C funding stage

Businesses which are at this stage are already quite successful and they are just trying to get funds in order to develop new products and expand their reach in the market.

Investors at this stage are also keen to invest in the business as they are expecting to get the double amount back. At this stage businesses seek funding to ensure the growth of their business as quickly and as successfully as possible.

Only a few startups will go for series D funding stage where they collect fund for special situations like a merger and so on.

6. Initial Public Offering (IPO)

Now, at this stage, for the first-time businesses offer corporate shares to the general public.

The businesses which are still growing go for IPO in order to raise their capital and those which are fully grown use IPO funds to exit their ownership.

Merger at this stage becomes extremely easy. By now your company must have become a giant in the market in its own sense and it must have established the credibility of its own hence generating capital from IPO is no difficulty.

So these are the main stages of startup funding. You need to make sure that you are getting appropriate funds at each and every stage in order to grow your business at a good pace.

This article first appeared in the business section of Revolutionary Entrepreneur.