Stages of Startup Funding and Venture Capital Funding
Until your business has attained a profitable stage, you cannot think of self-funding. Most often, startups need an outsider to invest in its business to facilitate growth and development. Usually, there are three main stages that you have to go through to raise funds for your startup.
StageS of Startup funding
Stage 1 – Angel Stage At the initial stage you can often approach individuals who are influential enough to invest in your business. Such individuals are also known as “angels” who invest nearly $ 25K to % 100K. While you can also take the first money from your family and friends but it is still preferable to go for those individuals who have a profile in the industry your startup is operating. These investors may invest up to thousands of dollars in your company and are usually quite interested to know who all are participating in the investment.
Stage 2 – Seed Stage This is the second stage and by this time you may have built a basic product and now you are ready for the next stage of financing also known as the seed stage or seed round. At this stage, there are various seed firms where the goal of the investors is to put their money on startups with huge market potential so that they can make their journey to the next stage and start earning revenue.
Stage 3 – Series A The series A is the complex of all the stages and usually marks the entry of the venture capital firms in the process. Venture capital firms or venture capital companies are private investors who typically prefer to invest in startups with huge market potential so that they can earn huge
ROI. Convincing a Venture capital firm to invest in the startup is quite a daunting task and usually requires recommendations from the seed stage investors or else, there are good chances that they will simply refuse to invest. However, if everything falls in place and you are able to receive the venture capital funding, it will give that much-needed momentum to your business to grow, expand and start earning profits. Typically, the VC firms invest at least a couple million dollars into the startup and they also keep a reserve in case you require more fund at a later stage. There are many startups who continue to raise additions rounds of funds until the company merges, gets acquired or goes public.
StageS of Venture Capital funding Venture capital funding is commonly divided into five stages as mentioned below:
Seed Stage This is the first stage of VC funding. You have to approach a VC firm with a business idea – that can be a product, a service or any technology. If the VC firm is not much impressed with the idea, it will not invest and if they find it a unique idea that can easily capture the market, the will invest. However, at times, they may find just a part of your idea suitable enough for further investigation. In that case, they can consider investing some amount of capital in it. Typically, with lots of uncertainties, this stage involves the maximum risk.
Startup Stage You have set up the organization and already completed the market survey. Now you are preparing for market launch of the product/service. The venture capital companies will now invest further for the materials and resources. By this time, the investors are actively involved in the management and development of the company and the risk involved is now comparatively less.
First Stage This stage marks the market launch of the product after thorough testing and investigation. The investors will now invest further to fulfill the next stages of requirements like sales, marketing and further production of the product. At this stage the capital requirement increases and the risk involved further decreases. You product has now crossed the developmental stage and is now ready for production and sale.
Second stage This stage involves the further growth and expansion of the business. Investors will now put money for market expansion, productivity increase and product diversification to help your startup attain a competitive position in the market. You now need to increase your sales and run a proper marketing campaign. Product-related fluctuations may arise so many services are introduced to avoid such situations. At this stage your company is witnessing aggressive growth so much that even the generated gains are not enough to facilitate market expansion. This means you are still dependent on the venture capital firm for capital support. However, risk has significantly reduced by now.
Bridge Stage This is the last stage of venture capital funding where your company has reached full maturity and has earned enough profits. So now it’s time for the VC firms to exit the venture with their share of profit. By this time, your company has achieved enough market share so if you wish, you can enter into a joint venture with some other company. At the end of the process, the venture capital firms sell their shares and exit the venture.
Venture capital funding is definitely a great option for any startup as it allows you to grow and expand your company at a much faster speed due to the constant supply of capital. However, the funding process also has some amount of risk attached to it as you are required to share your equity in the company with the investors. So it is always advisable to properly go through your business plan and determine whether this funding option is suitable for you or not. If you still feel the need, carefully go through all the terms and conditions of the VC firms before you reach a conclusion.
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