The world of start-up funding. You hear about it everywhere – deals, unicorns, valuations of millions and even billions…what are they? Where do they go? Why you must know about it?
We’re here to explain it all for you, even if you just started working on your start-up idea, if you are at the tenth one, or even if you just want to understand the news and headlines you’re reading about your fellow entrepreneurs and their successful deals.
Why do start-ups need funding
Because they need resources to create and launch their products. If you’ve been working on your idea or you already developed it into a functional product, you know how it goes –you need to access the resources and knowledge and you need to pay the people that will make your dream come true. No matter how big or small it is, you need money to bring it to life. You usually need money to:
- Do the market and audience research
- Create a prototype
- Test the prototype
- Hire a team
- Get consultation
- Buy materials and equipment
- Do marketing, sales, or recruiting
It doesn’t matter how much you need or where you are planning to get them. You do need to raise funds and you need to be smart about it. This article will show you what are the stages of funding you will go through, what are the types of rounds available, and where to get them from.
You will see why some prefer to loan from banks or why others insist on using only their own money. You will also see that there is no right or wrong way, only the one that is most suited to your situation.
The stages of funding your start-up
To make it easier for you to understand all the funding rounds and sources, and why some are best at a certain moment, we will first talk about the 4 stages of the start-up’s lifecycle. Each stage has specific milestones and this is how investments are justified. As you will see, most start-ups aren’t even close to being profitable in the first years but by touching the other milestones, the investors can follow the evolution and predict future success.
- The ideation stage is the earliest, the one where you only have a broad idea for a product or service. At this stage, you still need to validate the idea and learn as much as you can about it before actually bringing it to life. Everything is still in the concept phase so you are free to experiment before moving on to the next one.
- The validation stage is the next one, where you are supposed to build a prototype of your idea and test it with actual users, which will become your initial user base. For this, you also need to start hiring a team.
- The early traction stage comes after launching the prototype and getting the first users aboard, this is the stage where you start seeing results. This is when KPIs (key performance indicators) become important both for you and for investors. You can analyze them and start improving on them, especially the ones that are most relevant for your start-up’s growth – users, downloads, usage, etc.
- The scaling stage comes after all the lessons were learned during validation and can now be turned into a scalable blueprint for growth. You know what works and what operations to focus on for increasing revenue.
The sources available for funding you a start-up
- Self-funding / Bootstrapping
One of the most common sources for funding, especially in the ideation phase, it means using your financial resources to start working on your idea. By choosing self-funding, you will maintain full control over your business but you will also assume all the risks.
The choice for bootstrapping can also be strategic, especially for your long-term investment strategy. Investors and banks are impressed by this choice as it proves your long-term commitment to the project.
2. Love money/Friends and family
This is the capital that you can raise from your close ones – friends, and family most of the time. Depending on the situation, this can be a good or not-so-good option. You have to always consider the relationship you have with the people and how the money will affect it. This is why you must also set clear terms from the beginning regarding equity or repaying in any way.
3. Crowdfunding and Equity Crowdfunding
Crowdfunding is another method best used in the earliest stages of your start-up. It means raising money from a large number of people who believe in your idea. Usually, they get something small, symbolic in return for their donation. Today, crowdfunding is mostly done through platforms like Kickstarter.
Equity crowdfunding is similar but the “investors” that fund your idea get equity in return for their capital. This is done through platforms that target a broader category of investors which can pay way smaller tickets than in the case of angel investing. This is also done through platforms like Seedrs or Seedblink in Romania.
You can take a business loan to fund your start-up, especially if you are looking to maintain full control. To do this, you must prepare thorough financial documents before talking to banks.
You can look around and you will find multiple options depending on your needs – some banks offer personal business loans while others offer small business or start-up loans. In most cases, you will have to pay interest.
Angel Investors and Venture Capital funds
Both invest in multiple start-ups with high growth potential in return for equity or shares in the company. Most require to be involved in the decision-making progress, which can be a huge strategic advantage or the opposite, depending on your situation.
Angel investors are individuals who invest their own money in start-ups and expect a return on those. Most have experience in a field and are looking for start-ups at specific stages from certain industries.
Venture Capital firms also invest in start-ups with high growth potential and based on their business models, and investment propositions, they look for specific verticals, technologies, or start-ups at certain stages in their lifecycle. Their experience with investing in multiple start-ups over long periods can help you shortcut your growth path.
Nowadays, you have so many options to get funding for your start-up, as there are many other sources of capital. We listed the most common ones but you will also find investors who don’t fit any of the mentioned criteria. There are strategic investors, corporate investors, various groups and funds, and firms.
For example, we offer seed or pre-seed funding rounds but we also offer smart money, and we are actively looking for start-ups that can best use this additional support. This means that other than capital, we offer the knowledge and experience that we have, to help founders make the best decisions with the money they get. We also help them with sales, marketing, and recruiting and introduce them to our client network, if we notice any synergy.
If you think this is the kind of investor that can guarantee success for your start-up, contact us.Contact us
The types of funding rounds your start-up can raise
Pre-seed – Ideation stage
Being the earliest stage, the sums raised at this round are relatively small, as everything is still a concept. There is not much guarantee you can offer for it so not many investors are involved at this stage. This is why pre-seed rounds are usually raised from Bootstrapping, Love Money, or as prizes to certain events, contests or incubators.
To successfully move past the ideation stage, the money you raise should be used for market research, customer validation, and to find out if your idea is viable, new and what the business model for it will be.
At this stage, companies can be valuated anywhere between € 10.000 and € 3M and the rounds raised can be up to € 750.000.
Seed – Validation Stage
This is the first “official” round of capital you will raise that will help you grow your business. It is the money used to finance the first steps – research for product-market fit, product development, product launch and to identify the right target audience for it.
At this stage, you will most likely have to offer some equity in exchange for capital so this is why you can raise seed rounds from friends, founders, family but also incubators, venture capital funds, angel investors, and crowdfunding or equity crowdfunding.
At this stage, companies are evaluated between €3M to €10M and the rounds are between €10.000 to €2M.
As so many people and firms invest in start-ups nowadays, the criteria are quite loose. The sums differ and the stage of the start-up too. Some want to see working products, while others are trying to predict success based on other factors.
For example we, at Fortech Investments, offer pre-seed and seed rounds starting from €50.000 to founders that are working on their prototypes and on identifying the market for them, as well as those with a working MVP and a team. You too can apply here. All you have to do is tell us a bit about your idea and your progress so far. Our colleagues will contact you to have a more in-depth chat and after they analyze your proposal, we can invest as early as 30 days.Contact us
Series A – Early Traction Stage
This round is raised after you managed to create a user base and to set some KPIs at the previous stage. They should help you develop the product offering, keep growing the user base, and even expand your business geographically.
At this stage, you will have to offer shares of the company in exchange for capital, which will be used for business optimization and creating a scalable blueprint for business growth.
You can raise series A funding mostly from investment firms and venture capital funds that want to see a clear strategy and business model.
Companies at this stage are valued between €7M and €30M and the rounds are somewhere between €2M and €15M.
Series B – The Scaling stage
Capital raised at series B is used for scaling business and operations. After a blueprint for scalable growth was created during series A, you can now continue to expand your product offering, user base, and market reach. Most of the time, the funds are also used to create new departments and focus on talent acquisition and business development through new capabilities –technological development, sales, marketing, recruiting.
Series B funding is offered by Venture Capital Funds and Private Equity firms.
Companies that raise series B funding are valuated between €30M and €100M and the rounds are anywhere between €3M and €10M.
Further rounds – Series C, D, E
Similar to series B, all these rounds are raised to further scale the company and operations to a global level, as well as for acquiring other companies. These rounds can be raised from hedge funds, investment banks, and private equity firms.
No matter what stage you are with your idea, or what round you are raising, there will always be options for you. But it is your task to develop a clear investment strategy which will help you find the most suited investors for your start-up. By understanding all the concepts in this article, you are closer to raising your next round, from the investor that will help you most. If you think that’s us, don’t hesitate to contact us.Contact us