Typically startups will raise their funding in ’rounds’. This is often split into 5 categories:
Click on these ’rounds’ to find out more about each of these individually.
Startups look for funding in these so-called rounds for a number of reasons, this article will guide you on some of those reasons.
Risks When Raising Startup Funding
The most important reason that startups have to raise funding in different rounds is actually because of their investors rather than the company itself.
Investors and Venture Capitalist firms (VCs) will always undertake a risk assessment before investing in a new startup. If the investor was to give all of their money at once to a startup then they could not be sure that the funds were being used for the right reasons and to grow the company well.
Moreover, even if the funds were used correctly, the VC cannot be sure that the startup will succeed and grow its revenue. Therefore by giving money in rounds they can make sure that their investment is right. However, if a VC invests in a startup during Series A funding and sees that the startup is continuing to grow and has gained extra revenue streams, then they would be more inclined to give Series B funding.
This is because there is a lower risk of the funds being misused or the startup not being successful.
Using Funding for Startup Development
There are also reasons that the startup might want to raise their funding in rounds as well. One important reasons is for the development of the company. By waiting between rounds of funding, the startup can continue to develop and grow and see what areas of their business need investing in.
After Series B funding, a company might be ready to expand abroad and worldwide and money that may have been spent elsewhere if the funds had been given at once can now be distributed properly during Series C fund raising.
By funding in rounds, startups are able to show their investors a proper business plan as well as make sure that the funds given are going to the right areas at the right time for the development of the business.
Getting a Valuation
Lastly, a startup might want to raise funding in rounds because it allows them to have a clear view of their valuation. Investors and VCs will always do a due diligence check and a valuation of the company before they decided if and how much they are going to invest in a startup.
As funding happens and the company develops, the valuation of the company will go up. If Series A funding is successful and the company grows, their valuation will be higher when they are ready for Series B money. With a higher valuation they will be able to have more money invested in the startup allowing them more funds to continue to grow.
What Are Flexible “Rounds”
Not all startups will raise money in the traditional “rounds” that are mentioned above. Some startups prefer to raise money in “flexible rounds.” This means that they are not bound by the typical series of funding utilised by most startups. Many companies will look for crowdfunded equity which may take up less resources than pitching to VC’s and investment groups. This allows the company to focus on their growth rather than divert key resources towards trying to locate funding.