If you are just starting out, it is important to understand the different options that are available to you so you can make the best decision for your business. There are six levels of funding in a startup, and each one comes with its own characteristics. In this blog post, we will discuss each level in detail and help you determine which one you are currently at.
1. Pre-Seed Funding
This is the earliest stage of funding, and it usually comes from personal savings, friends, and family. If you are at this stage, you likely have a great idea but no track record or proof of concept.
At the pre-seed level, expect to use a lot of your own money and time to get things off the ground. You will likely be working on your business full-time and may not have a team to help you.
For this reason, it is best that you save up as much money as you can before starting your business. This will give you the best chance of success at this stage, since running out of money is one of the main causes of business dissolution.
2. Seed Capital
This is the earliest stage of funding, and it usually comes from personal savings, friends, family, crowdfunding, and banks. Even though most of these sources are not professional investors, they can still provide the seed money that you need to get your business off the ground.
If these sources are not available to you, there are also seed accelerators like Y-Combinator, Techstars, and 500 Startups. These accelerators invest in your startup and your personal development. They can help you prepare to pitch to potential investors further in the process.
The average amount of money raised at this stage is $4 million. This figure seems large, but it is actually quite small when you consider that most startups need at least $20 million to get to the next level.
3. Angel Investment
The next stage is angel investment, and this is when professional investors start to get involved. These are usually high-net-worth individuals who are looking for higher returns than they would get from traditional investments.
Angel investors differ from venture capital firms in that they are usually investing their own money, rather than pooled funds. This means that they can be more flexible with their investment terms. However, it also means that you should treat them as such when soliciting them.
The money raised at this stage is usually much more than it is in the seed round and angel investors will want a larger stake in your company. In return for a piece of your company, however, you will get the capital you need to grow as well as hands-on mentorship.
4. Venture Capital
The third stage of funding is venture capital, and this is when you start to pitch to VC firms. These firms are looking for high-growth startups that have the potential to scale quickly.
This type of funding usually comes with more restrictions than angel investment, as VC firms want to protect their investment. Typically, venture capitalists also have other assets to protect and want to grow their portfolio value for their shareholders. However, this kind of investment can also provide a lot more money than angel investment.
Because VC firms invest other people’s money, they vet the startups they invest in much more carefully. This means that you need to have a solid business plan and team in place before approaching them. Additionally, be prepared to answer lots of questions (often).
Venture capital investment has many stages, but the most common are Series A, B, and C. Most companies go public, get acquired, or run out of money before they get to. Click here to learn more.
The main purposes for Series A, B, and C funding rounds are to:
- prove the product-market fit
- build a sales and marketing team
- expand into new markets
However, if companies reach Series D funding, they are usually trying to:
- receive one final round to enter a new market
- get one final push before IPO
- save themselves from bankruptcy
Since the reason for Series D funding is so variable, the typical amount of funding at this level fluctuates.
5. Mezzanine Financing
Mezzanine financing is the fourth stage of funding, and it is usually a mix of debt and equity. This type of financing can be used to help companies that are too large for VC firms but are not yet ready for an IPO.
It can also be used to finance a buyout or recapitalization. In some cases, it can be used to finance the expansion of a company.
This type of financing is usually more expensive than other forms of financing because it is considered to be a higher risk. However, it can also provide a lot of money for companies that need it.
6. IPO
The final stage of funding is an IPO, and this is when a company goes public. This means that the company sells shares to investors in order to raise money.
This type of funding can be very beneficial for companies, as it can provide a lot of money. However, it also comes with a lot of restrictions and regulations. Additionally, going public can be a very difficult process.
Some of the main problems that public companies face are managing growth, meeting quarterly earnings expectations, and dealing with activist investors.
When it comes to making the decision of whether or not to IPO, it is important to weigh the pros and cons. There is no right or wrong answer, as each company is different. Some pros include:
- Access to a larger pool of capital
- Increased visibility
- More credibility
Some cons include:
- Loss of control
- Compliance costs
- Increased scrutiny
You need to decide what is best for your company and your situation. Only you can make the decision of whether or not an IPO is right for you.
Final Thoughts
At each level of finding, it’s crucial to have a solid understanding of what you’re getting into before taking any money. Make sure to do your research and consult with people who have been through the process before making any decisions.
Do you have any questions about the different levels of funding? Let us know by leaving us a reply!
