The different funding stages for startups

by Startacus Admin

If you’ve just started a new business, the concept of funding will be both necessary and daunting. News stories talk about companies raising money in different funding rounds – but what do those headlines actually mean?  

Harper James Solicitors work with start-ups throughout their evolution, seeing first-hand how the different stages of funding lead to growth. Here the firm breaks down the common funding phases startups go through to help you decipher the news and evaluate your financial position.

Concept/boot-strap stage

At this stage, you’ll be coming up with your idea and putting together prototypes and business plans. It’s likely you’ll be self-funded, or relying on friends and family for support.

To move to the next stage, you’ll need to focus on sourcing potential clients, creating a great pitch for meeting with investors and raising some funds to put together a workable product.

Crowdfunding

At this point, you may decide to crowdfund; a great option for companies who don’t want to offer up shares to outside investors, or for an idea exciting enough that private individuals would put money towards it in return for rewards. 

There are two basic crowdfunding models: offering equity in return for investment or offering an incentive (products or perks) for a donation.

Pre-seed

If you’re already well-established in your field or network, you may attract angel investors (people who invest large sums of their money in your business in return for a stake in the company) or early-stage venture capitalist funds (firms that invest cash in new businesses).

You can attract these investors by developing an attractive minimum viable product, or if you can already demonstrate orders or sales. Investors could be interested in providing finance for further product development or market research in return for a stake in your company. 

Seed round

During the seed round, you will be looking for capital to test your product, hire additional staff, and conduct market research – the funding you need to start operating on a bigger scale.

Specialised investors exist to service start-ups looking for seed investment, including angel investors and seed venture capitalists. Investors in seed funding may spread risk by investing in lots of different companies, so you’ll need to have a strong proposition to stand out.

You’ll need a management team in place to be successful in achieving investment, and should be prepared to allow investors involvement in your start-up.

Series A

If at this point you need more cash to scale, then you will move from early-stage funding on to Series A, B, C and beyond.

Series A financing enables a business to develop into a viable income-generating operation, providing long-term returns for investors. Traditional venture capital firms become involved, especially any that fit your industry. It’s also possible to include crowdfunding as part of Round A.

Round A investors are willing to take a greater risk with their cash in return for potentially larger returns. To be successful, you will need to show how you have invested previous capital and demonstrate how your business will grow.  

Series B

Series B is similar to Series A, with the addition of specialist VC firms that are more interested in high-growth companies. Your potential as a revenue-generating model has already been proven, and you are looking to consolidate your position and expand.

You’ll need a strong business case, a clear model, and ideas for further expansion. It’s not necessary to demonstrate profits, but you’ll need to show a timeline in which you expect to generate returns.

Series C and beyond

Further rounds of funding take start-ups into the bigger leagues. These funding rounds are used to acquire competitors, expand or develop new products and services. It’s easier to interest investors at these later stages, because you have already shown a successful track record. As you are successful, investors expect to double their money at least.

About: Advice provided by startup specialist law firm Harper James Solicitors, a full-service national commercial law firm who provide genuinely affordable, high-quality advice to entrepreneurs and high-growth companies in England and Wales.

Not having the right team is a common reason why startups fail. Read this advice from startup specialist law firm Harper James Solicitors for some of the key personalities and soft skills you'll need in your initial start-up team.

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Published on: 31st October 2019