Startup funding is how businesses and startup companies generate capital to launch their business. When businesses first start out, many seek additional funding in order to get their company up and running. This can be in addition to an investments from friends and family and the founder(s) own personal funds, and allows the business to expand.
This funding can help companies to obtain office space and offer jobs to employees to further progress the business. Each startup company should have the opportunity to engage in ‘seed’ funding rounds, even if they have an angel investor present from the outset. Seed funding rounds can then be followed by Series A, B and C rounds to gain further capital.
How Does Funding For Startups Work?
Funding occurs after analysts have completed an evaluation of a business. The analyst will assess the business’ management, market size, risk and their previous track record. Funding will be agreed between the business owners hoping for investment, and the investors themselves. Typically, investors will invest funds in return for a partial claim in the company. Companies usually begin with pre-seed followed by seed funding rounds before progressing through series A, B and C funding rounds.
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What Is Pre-Seed Funding?
Pre-seed funding is the stage which occurs before the seed funding round and is where the company is initially set up by the founders. Usually, the pre-seed funders are the original founders of the business alongside their support network of investors such as friends and family.
The amount of time taken to complete this stage of funding can depend on a variety of factors including the company’s nature and costs associated with establishing the business itself. Investors who provide funding for the company at this stage do not usually ask for part of the company in exchange for their investment if they are not already the founders.
What Is Seed Funding?
Seed funding is the first official funding stage. This stage represents the first official funds raised by a business and a common analogy is that this funding plants the ‘seed’, allowing a business to grow further. Seed funding allows a company to complete some product development and market research through the founding team.
Seed funding rounds typically generate funds through acquaintances of the founders alongside venture capital companies and angel investors. Angel investors tend to be more common within this funding round and expect part of the company in return for their investment.
What Is Series A Funding?
Series A funding is the funding round which comes after seed funding and occurs after a business has established performance indictors such as consistent revenue. Series A funding therefore allows businesses to further progress and scale their products. Within this round, companies are expected to have consistent business models and the investments usually come from venture capital firms or an individual firm willing to invest a large sum of money.
Companies frequently use equity crowdfunding to generate capital. Less than half of companies which take part in seed funding rounds go on to take part in Series A funding.
What Is Series B Funding?
Series B funding rounds usually take businesses past the development stage after the Series A funding round. These companies usually have established users and they use this funding round to help grow their company. This funding round is usually similar to the Series A round in terms of investors and capital, however there may be additional venture capital firms which are willing to invest due to their specialisation in investing at a later stage in the process.
What Is Series C Funding?
Series C funding comes after stages A and B and is designed for companies who are already successful in their sector. Companies tend to use funding at this stage to create additional products or services not previously offered. Investors at this stage are usually looking for double their investment in profit as the companies at this stage are aiming to scale themselves rapidly. This stage of funding is usually the last time a company will run a funding round to help increase their valuation.
At this stage, companies’ valuation is dependent on their results prior to the round rather than predictions for the future.