How Startup Funding Works (Seed, Series A, B, C)

April 8, 2020January 16, 2023 Shyam Kumar 1 Comment

Let’s explore “How startup funding works”. We made it easy and simple for you to understand.

Why would you need funding? Well, we all believe that with our funds or with family & friends financial help. Your business will grow to fortune. But this is not the whole story. A lot of startups don’t survive because they didn’t plan and had enough funding for their business.

You need more and more money when your business grows. That’s why a lot of companies give shares of their company in exchange for money. What is a share? Let’s say you have cake (i.e your company), to add another layer of your cake you will need more ingredients. For that, you need funding for ingredients, so you give a piece of cake in exchange for money (i.e called equity) then you use that money to earn more profit. Also, whoever took the equity is the co-owner of the company. But more importantly, they exchange it hoping that share price will rise and they will get more.

Also Read: How to Start your Startup [Complete Guide]

If you don’t understand the concept and plan strategically, your company will not be able to stand for more than 4 years.

Yes! Everything in a startup needs a lot of effort, but don’t let your hope die. You need to build an empire, you saw a dream so fulfill it by putting all your efforts. Just research properly, don’t miss out on a thing that is beneficial for your startup.

What is the funding round?

Funding rounds are like stages that a company goes through to grow their company. Funding rounds is a stage in which entrepreneurs take the money from an interested investor in exchange for equity, or partial ownership. Also, growing through these stages, you have to prove that your company will succeed and stand longer.

In these rounds, the valuation of the company is evaluated. What is valuation? Valuation refers to the process of determining the worth of the whole company in the current period.

If your company shows great results, after getting funding from investors. They will stay and continue to be the stakeholder of the company. What is a stakeholder? Stakeholders are those individuals who are benefited by the company. They can be investors, employees, customers, etc.

Also Read: How To Write a Business Plan

Besides this, you should know about the term sheet. The term sheet is a document in which both parties i.e startup and investors come to an agreement, how much to be invested, for what period and in what terms.

A situation can also arise in this, i.e Buyer’s market(when supply exceeds demand). An investor can refuse for investment due to some reasons, maybe they don’t find your startup worth enough. So don’t get upset or disappointed, you have to make it worth it that no one can turn down.

How Startup Funding Works?

There are some steps that typically included in each round, the following are:

Collect your data
Research investors
Create a presentation to present your startup with a winning pitch(pitch is important to get investors for your startup, prepare it and also prepare the solutions to those problems that can arise)
Attend the meeting with investors and give your best in the pitch, show them your worth
Build a relationship with investors, so that you can be in good terms with them
Creating term sheets and offers
Survive due diligence ( due diligence is an investigation or audit of the company taken before entering the agreement)
Close the round with wire transfers (method of electronic fund transfer from one person to another) and executing the paperwork

A lot of entrepreneurs took help or recruited third performers to take care of this process. These processes can take time from 3 months up to a year depending on the situation.

Just remember and focus on one thing in this whole process that pitch is most important. As an entrepreneur, master in pitching your ideas and business, it will help you in a lot of things that lead you to greater achievement and growth.

Also Read: How to Get Funding For Startup

Now, let’s discuss and understands the funding rounds:

1. Pre-seed

This is the very first step of your startup. It is generally not included in the funding rounds. Basically, turning your ideas into action known as pre-seed.

In this stage, you bootstrap (this term refers to the situation where you invest your own money in your startup) your funding or by family and friends. It is also called the family and friends stage.

If your idea is unique or has the best pitch or you are lucky enough by getting investment from angel investors (these are those investors who fund the startup at the early stage).

Angle investors can take part in early-stage as well, where no other investor took interest in investing. Obviously, they don’t want to take the risk by funding early-stage startups. Also, this fund is to start your business so it will be a bigger risk for them.

You may wonder why they are known as angel investors because they are an angel for the startups who bless them with starting funds. They are also known as business angels, informal investors, angel funder, private investors or seed investors.

2. Seed Round

It is officially the first stage of the funding round. If you and your business have potential and growing then only you can expand to series A and further. In this stage, fundings are usually collected from Angel investors, targeted date funds (It is an investment fund is a class of a mutual fund, it rebalances your investment from high-risk, high-reward to low-risk, low-reward as time passes), Accelerators (Also, known as seed accelerators, a unit-based program that includes seed investment, connections, sales, mentorship, educational components, and culminate (reaches the highest development) in the public pitch event), and incubators ( It is a company that ensures their client(which are all startups) have sufficient resources like an investment, technical knowledge, and other necessary tools that will be needed in the growth of a startup. Startups offered incubation period also).

These funding can be called equity investors because they provide business development or product development in exchange for equity.

Why is this round called seed? This round is known as seed investors because of the situation like seed and tree. You plant a seed into a field (which is “fertile” i.e started the business) to get better results and more profit to you and that will be a “Tree”.

There is one more important thing: a seed will grow into a tree only when both parties, i.e Owner and co-owners (investors) are being gritty and dedicated toward the company. Only then you can expect better results. Investing money is just a single step. I have already said that in the startup you do need a lot of effort, therefore using that investment in the right place and using it strategically is also necessary. If you don’t do that you won’t be able to reach higher heights. Plan strategically!

If you work hard enough and want your business at a higher level then your seed investment can be much larger amounts invested by angel investors or venture capital companies (It refers to private financing firms that provide funds to startups that have high growth potential or which demonstrated high growth).

It is also preferred to work with or under the well-managed angel investors or venture capital firms, they will work out with you to generate high returns and give proper guidance. If your startup plan performs well in seed stage, they will invest a larger amount and stick with you in further rounds as well.

3. Series A

To make it into the Series A funding, absolutely you need to put effort. You have to make sure your business is running in a good direction and have potential growth. To see if you have been good so far, you will need proof or data to show in front of investors. That data will be called track record (refers to your past and current performance, achievements or failures).

In this stage and to move further in the competition, you have to make sure that you have a good and proven track record. This track record is a big barrier for every startup or small scale business.

And keep this in mind, if you dream of bigger heights you to have plan precisely in each and every round of funding. Planning is the base for everything, so make sure you do it smartly. If you do want to overcome all the hurdles and be the greater competition for others then you do need to reach in series A and overcome all the problems.

If you and your strategies show great potential, it will be a great break for you because you not only came up with an idea but also turned it into something that has a very high return. Once you show that or reach that potential, you won’t need your pitch to get investors. Investors only want money-making machines with low risk not only a great idea but also a strong strategy by a true entrepreneur.

All you need to secure one investor in this stage and that will be “anchor investor”. If you successfully succeed it then you will be able to attract other investors toward you and other types of investors will join you as well in this round that will be family offices, a private equity firm, hedge funds (This private firm, create partnership and pool funds to reinvest them to earn active returns for their investors), and corporate venture arms (commonly used name for venture capital).

4. Series B

You and your business are growing and passing these stages. Series A was the development stage and now it’s time to reach the enterprise level. Now you should definitely look for venture capital level participation. Both Series may seem similar in terms of process or an anchor investor, who will attract other investors. But you are in the big league now, the average valuation you tend to reflect on the company will be $58 million.

Now, investors will help you to expand your market reach, teams, or geographical expansion. You need to choose carefully your investors in this stage and always say that to plan strategically you will need an advertising team, sales, tech, and market team with lots of potential employees. You have already proved yourself that your company is worthy, and now by reaching the new market, you will also need a better or a winning product.

5. Series C

You proved yourself again and again but at this level, investors will be demanding still you go through a lot of competitions and overcome all the hurdles and your company will be valued above $100 million. This means you will raise your fundings above $ 50 million.

Now, you have to think in the very depths and would like to ask yourself what is your next goal. This series can be an exit for you if you don’t wish to go further. Also, If you wish to go further then you can focus on the global expansion of your company which will mean expanding into a new market range with new products or services or you can even acquire other companies too. You will probably want to cross borders, grow faster, and successful.

Once you are able to scale your business, that means you are able to handle a growing amount of sales in a very capable and cost-effective manner. And series C funding is focused on it. Also, most of the companies stop funding after getting in series C funding, but some of the companies who were unable to complete their target even with the series C fundings then they tend to go for higher fundings.

For example, Oyo rooms are in the series F funding and they raised $1.5 Billion in that funding round. It is obvious because there is less risk in operations that’s why more investors are attracted.

Conclusion:

These funding rounds can be intensive and will take a lot of your time and research. So get a better plan for the execution of your startup plan and show good traction of business for a higher chance of raising funding with good valuation.