Introduction to your next funding venture
How Funding A Start-Up Works
If you don’t happen to have a spare few million to invest in your business, when you first come up with a plan, you’ll likely need to find the investment money elsewhere. That’s where the funding challenge comes to play. In this article, we will explain the intricacies of funding a start-up and invite you to consider the number of ‘rounds’ your funding venture should take.
First of all, you have to realise that funding your business will enable it to hit the ground running and scale up quicker, but it comes with the price of your company’s equity. To those, who put their money towards your endeavour, a certain part of the business’s shares will be given. It’s an exchange, where you give up a promise of a profit for the investment they are making today.
What Investment Rounds Are There
If you’re already in the process of setting up a business, you might have the investment strategy ready, but to make sure we are on the same page, let us quickly explain it. Throughout a limited timeframe, you will commit to ‘raising’ investment funding. The deadlines are completely up to you, but remember to consider them with an appropriate reason.
The number of rounds is also up to you to decide, but in general, this process can be divided into these six stages:
- Pre-Seed – in this initial investing period, it is usually up to you (the founder), your family and friends, and potentially a few investors that believe in your idea, to collect enough financial support for the company to start. This part of investment raising isn’t usually officially announced and happens privately often without the promise of any return or equity value. The contributions at this stage may vary between 1 to 500K.
- Seed – once the first few customers are satisfied and your business gains traction, the time for the second stage of investing rolls in. As if ‘planting a seed’ the company tries to secure more funding for its activity in exchange for its equity.The interested group usually consists of new group of investors (commonly known as ‘angels’) and VC’s (Venture Capital), so the investing companies that specialise in funding new businesses of any kind. The contributions at this stage may vary between 500K – 4M.
- Series A – at this point your business is growing. It might be the time to scale, meaning extend its reach and grow the company internally. New markets may call for more investment, which is why this stage might come in handy. Usually ‘Super Angels’ and more VC’s are interested in contributing at this point. The contributions at this stage may vary between 5M – 15M.
- Series B – once the development stage is over, you might decide to take your company to another level. That’s where Series B funding becomes viable. The potential investors are likely to consist of major Angels and VC’s, who specialise in ‘later stage investments’. The contributions at this stage may vary between 25 – 50M.
- Series C – businesses that make it to Series C funding sessions are already greatly successful. The investment here is gained in order to expand further, develop new products or simply scale the company even more. The group of potential investors may grow substantially, as the risk connected to investing isn’t so high anymore. Hedge Funds, investment banks, and private equity firms may wish to exchange their funds for a piece of the pie. The contributions at this stage may vary between 50 – 100M.
As this is only an outline, we won’t dive deeper into the differences of these stages. It is important to note that each one simply builds upon the previous one, making the investment less risky and more likely to be profitable. It may also increase the company’s potential, which is why many businesses decide to raise funding consistently over the time of their existence.
How Many Investment Rounds Do You Need
Now, as you know a little more about the investment process, let’s think of the potential use of this knowledge. Depending on your company’s situation, you will need different quantities of funding to improve its development. The best question to ask oneself first is – what are you aiming for?
Your start-up can become a global sensation, a local favourite, or a niche-monopolising entity. It is for you to decide its goal for the future. In ‘pre-seed’ and ‘seed’ funding stages of the fundraising you might already gain enough resources to successfully achieve your venture’s dream. There is no ‘one size fits all’, so make sure you approach this question with your company’s ‘why’ in mind.
The Other Side Of The Coin
We wouldn’t make this article fair, if we didn’t warn you of the potential prize, which is to pay for raising any funding at all. Well, maybe apart from the initial few thousand you might get from your loved ones.
The other side of the funding coin is the fact of leaving your company’s equity in externally-based ‘hands’. You sell the shares for money, but depending on the percentage of the shares sold your business might or might not be affected deeper by those sales. Stakeholders could become your business’s bosses, so make sure you are satisfied with the group that gets to own a part of your company.
A Well Informed Decision
Start Up Business Advisors Ltd. wants you to make the kind of decision that impacts your business venture in the most positive way possible. That is why, with the information above and the wealth of information you are able to find on our site, we would like to offer you a consultation call for free. Let us help you in understanding the subject of investment raising even better. Book a call today and see what could be done to improve your company’s potential.