Pre-Seed to Pre-IPO
You have a stellar business startup concept ready to turn into something big. You are itchy and determined to go to market, but alas, you have no money to prepare and launch your new product or service. Relax, you are in good company. Finding funds for startups is the most common challenge for entrepreneurs. And, unfortunately, lack of capital is likely the most common reason new businesses don’t get off the ground.
So, we can probably agree that capital funding is the lifeblood of every startup company. Whether you are launching a fresh new business or want to grow a current one, it is essential to be well educated about where and how to source funds for startups.
Creating your own business goes well beyond having a brilliant idea. It requires tenacity, time, energy, effort, and of course, money. You probably know all about investors, but you may be surprised to know that getting an investor is not always so simple.
The array of startup funding stages have stimulated the business landscape. Years ago, there were few fundraising options, but today there is a solid list of funding sources available to suit the different stages of business need.
As a startup entrepreneur, you must be familiar with all of them and appreciate how much capital you can get from these external sources. Now, before you get side-tracked by your business idea, is the time to get serious about where your startup is heading. Make educated choices about how to fund your startup and how you are going to get it.
In this post, I give you a full review of all the classic funding stages and categories of funds for startups. And, I review the conditions each money source is appropriate to use. Use this guide to select your best source of startup funds, and begin pitching your business plan!
The Big Picture of Startup Financing Stages
The following chart shows several capital funding options in relation to the early and later stages of startup evolution. The funding options vary with the magnitude of capital needed.
Virtually all startups begin by spending more capital than they receive in revenue income. Be aware, financially you will initially descend into the so-called Valley-of-Death, which lasts only until ‘break-even’, the business production level at which total revenues for a product equal total expenses.
Depending on the amount of startup money needed to get the new business underway, more capital infusions may be required to maintain positive business cash flows (i.e. more startup capital or new ‘working capital’).
Eventually, expansion of the business will possibly require more new capital in large orders of magnitude. Escalating business growth requires finding bigger and more sophisticated sources of investment money.
Be aware, as an original founder, you’ll move from full ownership of your startup business to the advanced growth regions of the chart. Here you will inevitably have to give up increasingly larger shares of your original equity and management control to increasingly bigger money investors.
This is usual and not a bad thing. Consider, early valuation of your startup business can go from low millions, then climb to tens and eventually even hundreds of millions of dollars. Your then reduced ownership of say, 30%, of a $100 million business (i.e. $30 million) is still much greater than 100% ownership of a $10 million business! You as the original founder become more wealthy but inevitably lose a big chunk of your previous business control. It is rare for founders to remain fully in charge once they exchange their equity for investment capital to advance the business, but the financial payoff is usually huge.
The 3 General Categories of Startup Funds
There are three very broad categories of funding for startups. They will either cost you debt or equity and in rare cases are “free money”.
1. Debt Financing
Debt financing can originate from your bank, your rich uncle, a second mortgage on your house or your personal credit cards.
This is money for a startup that you’ll have to pay back with interest charges over an agreed time frame. Unfortunately, interest rates can be high, and your cash flow low. And, it can be a long time of heavy financial burden before you pay it all back.
Also, expect to have some sort of existing cash flow or be able to use some large form of collateral for a bank loan.
2. Trade Equity for Startup Funding
As I mentioned earlier, using equity means trading a percentage of your business ownership at market value in exchange for money at the middle to late stage of the startup.
The providers of this type of funding are typically professional investors who expect to be ‘pitched’ to and also expect you to have a well-prepared business plan. The investor will need to see a real perceived value or at least proof of concept to fortify their confidence.
If you’ve watched the tv series Dragon’s Den you may have noticed the participants bargain hard for a percentage share of the business being pitched in exchange for the investment they offer. Entrepreneurs on the other hand want to lower the amount of equity they give up since it lowers their profits in the future. This is risky since once more the majority share of a company’s equity is sold, it usually results in the founder losing company control.
3. Grants and Guaranteed Loans
Startup business grants are typically from a government source. Unless there are unusual circumstances, such as during the Covid-19 pandemic, business grants are not easy to get. If you are lucky enough to get one, it is literally “free money” you’ll never have to pay back.
On the other hand, grants usually come with considerable oversight and scrutiny from the
grant provider.
There is another category too. A ‘guaranteed loan’ is a contractual obligation between the government, a bank and the loan borrower that the government agrees to guarantee payment of the borrower's debt obligation in the event that the borrower defaults. This is not exactly free money, but you are free of the debt burden if the worst happens and your startup fails and all your funds are largely consumed, leaving little or no money to pay off the loan.
Stages and Sources of Funds for Startups and Scale-Ups
It’s a tall order, but I want to provide you with the most comprehensive list and descriptions of every popular source of funding for startup businesses, literally from the ground up. I’ve tried to organize them in the order that they would usually be used. But, be aware that they don’t necessarily fit perfectly in sequence because there are multiple factors that determine which option to choose.
There is, however, an obvious logic to the order, which I have arranged below. The list tends to begin with the lower, more intimate funding sources and lower funding levels initially, running up to the biggest and most professional investor funding options at the high end.
Pre-Seed Funding Stage - Creative Capital
This stage in funding your new company is of course the first in the process. Referred to as "pre-seed" funding, it’s the period when, as the company founder, you are simply trying to get your operations off the ground. It’s not considered a true step in the so-called “rounds” of investment funding at all.
During the pre-seed step, you are involved in research or testing the viability of your idea. You’ll discover if another enterprise has developed a similar concept, calculate your costs, prepare a business model you can proceed with, and grow your concept into a true early-stage business.
Usually, pre-seed startup funders are the founders of the enterprise. This stage may also include money from your friends, family or other supporters who don’t expect to contribute startup funds in exchange for company equity.
Depending on the type of business and the early set-up costs associated with developing the business concept, this stage of startup funding may happen quickly or can also take a long time.
Officially, this isn’t a true source of startup funding. You’re simply paying for the earliest stage of startup yourself with your own cash while reducing expenses so you can still pay your bills.
During this challenging initial period in your business experience, you are truly on your own. It is a necessary foundation for what comes next when you need other people’s money. It is more challenging to convince someone else to risk their money on your business concept if you haven’t already done the same.
There is a host of possible pre-seed funding sources:
Pre-Seed “Bootstrapping”
“Bootstrapping” is a term from the 19th-century that simply means... "pulling yourself up by your own bootstraps." This impossible task ultimately became a metaphor for achieving success without outside help. Here are the self-funding options that are commonly used:
Personal Savings
This is usually the income you accumulate for special purposes after what you have spent for personal needs and income tax. A startup definitely qualifies as a special purpose and will be the first thing that bootstrappers consider using before they tap any other sources of early capital.
Personal Debt
Bank Loans - It's nice if you can get one, but the truth is, banks require collateral and startup founders notoriously don’t have any collateral.
Credit Cards - Many entrepreneurs have managed to get a new business underway by literally maxing out their credit cards to cover the earliest business expenses.
Startup Business Line of Credit - This is credit offered to startups as a kind of revolving capital. It works like a credit card. If you are given $100,000 in credit capital, you can access it at any time and just pay interest on the balance owing.
Second Mortgage - A second mortgage or home equity line of credit is most often used to make home repairs or remodel a house. Your home is the collateral if you can’t pay it back — so using a second mortgage on something as potentially risky as starting a business must be rationalized with a cool head and a lot of pragmatism.
Funding with Cash Flow
When your company begins making money, you may be able to use that money to entirely fund the business from then on. If you are patient you’ll make sufficient money to pay yourself back. Soon you’ll make enough more money to hire employee #1. A little more business income will fund an actual office, etc.
Eventually, you’ll be able to reinvest enough of your business profits back into the business, without needing investor funds and you’ll retain full control of your company. This option has serious rewards but requires a lot of patience and focus as your business slowly gains “traction” with your target demographic.
This option is the hope of the majority of startup businesses, so long as they don’t require rapid growth...and cash flows turn positive early enough to make it work,
External Pre-Seed Funding Sources
When you’ve exceeded your own bootstrapping capacity for funding your startup there are multiple alternative sources to turn to for new money needed to elevate your business to the next level:
Family and Friends
When considering where to get startup funding it is usually recommended you start with sources closest to you, then funding sources further out when it comes to selling your business. Said another way...begin looking for funding your business from family and friends.
This may sound unpleasant or even terrifying. Depending on your relationships with your relatives and friends though, it may not always be a viable option.
Too often though solo-entrepreneurs try to start a new business with too few resources like they have to create success from virtually nothing. Realistically, most people have a lot of connections. Plenty of those people might have tremendous confidence in them.
Friends and family are some of the most common business startup funding sources. Even though these people in our inner circle may not have endless money to offer us, the money they can provide you with may be advantageous in a few ways:
People who are close to you are more likely to take a risk with you and your business concept in an effort to truly support you and offer funds at low interest or even no interest or for a low equity percentage.
Startup funds from people you know create more commitment to success and positive returns on their money used as capital for your business.
Friends and family are more likely to be supportive rather than pressuring you as many investors will.
You want a type of ongoing partnership with like-minded people you already are connected to. Once they believe in your business plans, they’ll be enthusiastic. Who could ask for a better backer than that? Also, if they actually use your product or service, you have a test market and early adopter all in one.
Be cautious though, this is a very intimate financial relationship that has to be treated very seriously. It can be a terrific success or a dreadful disaster...be careful how you handle it.
Be aware that you may have resistance and feel too embarrassed to approach friends and family. If your ambivalence is too strong, you better rethink your interest in forming a new business. After all, if you feel too awkward asking people close to you for startup money, asking investors for larger amounts of capital will be even more challenging!
Crowdfunding
In recent years Crowdfunding has quickly become a popular way for entrepreneurs to get startup funds. Crowdfunding has opened infinite possibilities for companies to get started.
Crowdfunding means getting a large group of people to support your company with small individual money contributions. These people will not always be able to know how your business is operated, depending on the crowdfunding platform, but they each share a relatively small risk because together they enthusiastically want the project in question to exist.
“Donation-based” supporters receive the satisfaction of freely helping someone else get a new business started.
“Rewards-based” supporters become a small part of a business founder’s story, help put a desirable project into mass-production, and usually receive one of the products themselves.
“Equity-based” supporters help bring a new company into existence and receive some good returns on their initial investment over time.
Microloans
A microloan program provides small unsecured business loans up to in the several thousand to tens of thousands range to help small businesses start and expand. According to the SBA in the US their average microloan is about $13,000.
Government Grants and Loans
In Canada, you will find literally tons of federal business grants and unsecured business loan programs and provincial grant programs for businesses of all sizes and growth stages, far too numerous to mention here.
It can be daunting to research them all. To help, I have written articles on Canadian Federal business grants and loans and British Columbia provincial grants and loans.
Accelerators
If you are interested in moving into the fast lane and want considerably more than some money thrown your way, accelerators are something you should consider, especially if you are building a tech startup.
Accelerators supercharge early-stage growth by offering short term programs of 2 to 4 months. They provide funding to entrepreneurs that pass scrutiny in exchange for business equity, and they invite you into their program.
Their programs provide professional mentorship and office space for you and your staff or co-founders. An accelerator program is typically quite gruelling, but if you want to speed up an early stage in your startup growth it may be the best option for you. A defining factor with accelerators is the very short-term timeframes involved, often finishing up with a major presentation session, or “demo day.” “Incubators”, on the other hand, offer similar terms and support, but tend to last a few years),
Accelerators also offer startups solid opportunities for networking with other startups and mentors in the business community. It is fair to say that accelerators are usually considerably more focused on developing the entrepreneurs or founding teams themselves than their business’s ideas.
Equipment Financing
When a startup requires considerable equipment to operate its business, “equipment financing” may be the best option. Here are the four types of equipment financing:
1. Asset Lease
Here the financier buys the equipment on your behalf. Your startup business uses it in its operations while making monthly payments to the financier for the duration of the lease term. After the term ends you can either pay a residual amount for full equipment ownership, refinance the residual amount to further the lease or sell the equipment and begin a new lease with new equipment.
2. Commercial Equipment (Chattel) Mortgage
You take ownership of the equipment (chattel) at the time of purchasing (from funds advanced to you by the financier). The financier then takes out a mortgage over the equipment as security on the loan. When the loan is fully paid and the contract term has ended, the interest is removed which means you then have a clear title of the equipment.
3. Equipment Rental
Like asset leasing, the financier purchases the equipment and you’re able to rent it from the financier with fixed monthly repayments over a fixed term. Once the contract is finished, you can either return the equipment, continue renting or buy it from the financier at the going price.
4. Cashflow Funding
Your future cash flow (i.e. invoices yet to be paid) can be used as security for borrowing. This is especially useful for a startup that has longer payment terms (3+ months). You essentially use future income to help your business function now.
Scientific Research and Experimental Development (SR&ED) tax credit
Tax incentives from the federal government to get Canadian startups and other businesses of all industries and sizes to perform research and development in Canada.
Corporations, individuals, trusts and partnership members can take advantage of these Government of Canada incentives.
Western Economic Diversification Canada
This federal government department works to diversify the western economy and improve the quality of life of western Canadians by focusing on business development, innovation and community development in Manitoba, British Columbia, Saskatchewan and Alberta.
Their programs include funding and advisory support for research and development (R&D), innovation and commercialization projects.
Local Economic Development Organizations
There are multiple organizations, regional trusts and Crown corporations responsible for the economic development of all communities throughout B.C.
This includes good potential for small business startup resources.
Alternative P2P Lenders
Groups of friends and acquaintances pool money to offer business funding in circumstances where regular financial institutions won't or don't work.
Canadian peer-to-peer (P2P) platforms like goPeer and Lending Loop connect borrowers with lenders They claim to be quicker and more accessible than large banks and other financial institutions
The Scientific Research and Experimental Development Tax Incentive Program finance or SR&ED tax credit loans
The (SR&ED) credit is treated as a future business receivable.
Businesses are provided with a receivables funding loan. Businesses can draw down on this loan as they need it for general working capital to operate their business.
The loan is repaid from the federal government CRA SR&ED tax credit refund.
Canada Small Business Financing Loan (CSBFL)
A government-sponsored loan program. It offers up to $1 million ($350K for equipment and leasehold improvements) to Canadian small businesses.
Futurpreneur Loans
Futurpreneur helps Canadian business owners 18-39 years old to launch successful new businesses throughout Canada. Through a series of available programs, it also provides mentorship and consultancy for up to 2 years.
Futurpreneur also issues collateral-free loans of $60K ($20K from Futurpreneur and $40K from the BDA (Business Development Bank of Canada). The loans have a 5-year term.
Investors
Before we move on to the next sources of funds for startups, we need to characterize what types of investors there are available to you.
Generally speaking, an investor is anyone who has control over a pool of assets. They invest money into a project in exchange for a share of the related business equity. Consequently, they have their own agenda and they are not neutral participants in your business.
Investors use their money in wise ways, like increasing market share through marketing, and not using funds for unneeded costs. By definition, they expect a return on their investments usually over a tight time period—this is often a 10x return in up to 5 years. This happens when your company goes “public” -- or is sold off.
The expectations of investors usually make dealing with investors quite challenging. They will likely focus on growth and encourage you to expand your business assets. Not necessarily in line with what you and your team wish.
However, If you want to create a huge business rapidly, accepting investment funds is effectively the only way to do it. Nearly all businesses that grow large and fast these days do so through using investor money.
There are essentially just three investor types:
Personal Investors
Personal Investors, we already know well... typically friends and family, as described above.
Angel Investors
Angel Investors in Canada are a good source of capital when you have a healthy growing early-stage business. They invest in relatively small amounts (tens to hundreds of thousands of dollars) in exchange for equity and frequently accept other forms of growth than revenue.
Often they are also entrepreneurs who have achieved a wealth of their own, versus huge investment funds. Angel Investors want to seed businesses they develop trust and enthusiasm in at their young stages of growth. Often they fill the space between friends and family support and bigger investments like venture capital.
Venture Capital Investors
Venture Capitalists (VCs), are usually experienced investors looking to make big returns relatively quickly by investing in other entrepreneurs' rational business ideas. A VC accepts a certain amount of risk that they will not make their money back from many, possibly most, of their investments, fully expecting that several of their investments will pay off in a huge way. Although they are fully prepared to accept risk, they are very careful about who they invest in.
They don’t often pour money into an unproven business concept. VCs will demand a record of performance to date (evidence of traction) and some demonstrable value before putting startup money into a new business. Venture capitalists only operate in the range of millions of dollars invested. So, if you’re just getting started, a VC is likely not the sort of investor for you.
The Seed-Funding Stage - Early Maturity
The “seed stage” is very different from the pre-seed stage. Seed funding is all about showing early signs of business maturity development. In addition to your personal cash, the bulk of funding is still coming from friendly and free sources, but not enough to scale up the business to the next level of growth.
By now you have a properly developed product or service, plus traction in your target market niche. You have refined the ultimate direction of your business. Although your “business model” is still immature, you do have a brand name, a product or service name, and some initial brand identity in the market.
You have a working prototype or an initial production run, but do not have mass-market capacity.
Now new seed investors will help you to transition from proof of concept and your first sales to a fully commercialized product or service. And you must be prepared to provide them with equity against seed funding.
The financial risks are high since your startup can’t guarantee a successful business model. As a founder, you now need to focus on producing a minimum viable product, orienting the company to the marketplace and being certain you know what your customers truly want and need.
You will be expected to confidently pitch your business story to seed money investors. When you meet with them, be ready to answer tough questions and negotiate to retain as much control of your original equity as possible.
Your funding request will likely be in the $10,000 to $2,000,000 range. Some companies will not need to extend beyond the seed funding stage.
Your business will probably be evaluated in the area of $3 million to $6 million, depending on what industry you are in.
Series A Funding - Demonstrating Traction
When your business is up and comfortably running, there can still be logical reasons to raise more finance. This is the time to initiate a Series A round.
The reasons to use investors' capital include scaling production growth higher, starting a franchise or staffing and opening new offices or other facilities in new locations.
At this stage is that your business model must be well-proven (have traction in the market). The business as it stands now should be fairly mature and sustainable, with an identifiable “valuation”.
Investors refer to this as “Product/Market Fit” (PMF) A big milestone for any startup that shows there is differentiated and sustainable demand in the market for your product or service.
A related term is “Minimum Viable Segment”, which you will aim to reach before PMF. Rather than entering the whole market, it is a way to capture sustainable market demand by focusing on just a single segment, before scaling up to a broader market.
What is Series A Funding?
Series A funds are an external investment to cover the costs of your business venture once you reach PMF.
By this stage, your startup company must be coping well with operating costs and its valuation will be several million dollars.
Although, your startup may need outside help to scale up more quickly in order to capitalize on the full demand from your target market.
Getting Series A Funding
To convince investors to put up funds into your business - at this stage usually, several million dollars - a clear and thorough company valuation is required.
There are different formulas for valuing a business. Examples include order book value, the cost or resale value of company assets, and often a combination of many important qualities of your startup company.
It will be natural to select a method that presents your business in the best scenario possible. But, you must be able to vigorously defend your valuation if investors challenge it.
This way you defend yourself from significant risks, starting with taking on added liability your company can’t actually support, to allegations of intentional fraud.
Be certain you are educated about the usual finance magnitude of Series A investment rounds in your business market. It can range broadly, predominantly in high-growth industries, so good research will assist you to determine that you request the optimum amount.
When a startup company has established solid performance (a valid user base, reliable revenue income, or some alternate key performance indicator), you may opt for Series A funding to further refine its customer base and products.
You may decide to grow the enterprise across bigger and broader markets. Be sure to have a well-developed plan for your business model In this round, that will predictably gain long-term profit. Occasionally, seed startups have great concepts that create considerable eagerness with users of the product but lack the skill to make it monetize the business.
Normally, Series A rounds attract $2 million to $15 million, although this range has grown due to high tech industry valuations. The average Series A funding in 2020 was $15.6 million.
Series A funding, investors don’t simply want startup companies with impressive business concepts. They want startups to also bring a strong strategic plan for turning that idea into a high performing, money-making enterprise. This is why it is not uncommon these days for startup firms going through Series A funding rounds to be valued at up to $23 million.
Series A investors come from the more established venture capital firms. Mainstream VC firms that engage in Series A investment include Creative Destruction Lab, TIMIA Capital
Garage Capital, Fairfax Financial Holdings and Panache Ventures.
In this funding stage, it is usual for VCs to participate in the political process of the startup process.
It is normal for several venture capital firms to be ahead of the pack. Often, a single VC serves as the “anchor”, whereby once a startup has settled on its initial investor, it’s often then simpler to get more investors. Frequently, Angel Investors in Canada will participate in Series A funding, although with less influence than they enjoyed in the seeding rounds.
Equity crowdfunding platforms are also often invited to make up a portion of Series A investment capital. This happens because many, possibly most, startups aren’t successful in attracting all or any of the venture capital funding they need. Less than 50% of companies with seed funding are able to attract Series A VC money.
In the overall startup capital funding period, Series A is the stage that people consider to be the serious ‘start’ of funding. Your business model is beginning to show signs of being a truly viable business, you have a functioning prototype, and therefore your startup gets increasing attention.
Other than tech industry ventures and science-based firms, most companies are fully operational but need to go to another level. You will normally look for a single VC or a group of VCs. Naturally, the funds required is going to be considerably more than your seeding rounds, and for the first time, you are faced with having to give up part of your business equity as payment for the investment in your startup.
It is for this reason that Series A is one of the most challenging and emotional. As an entrepreneur, you now must collaborate with VCs and possibly Angel investors to improve your business model, add more people to the team, local more partners, and control your spending “burn rate”.
This is the stage to prepare for a whole new surge in growth and overall market and financial performance success. There is also a big leap in the investment funds, higher than your seed money, probably in the $1,000,000 to $15,000,000 range and consequently, investors need to hear a substantial story to actually commit to the required funding.
Series B Funding - Betting on Revenue Performance
The next big stage of financing your continued business growth is Series B capital funding.
At this stage your startup is not so much a startup any longer, it’s now gaining maturity. It consistently covers its own operating costs and steadily shows good profits.
The fact that you and your company are at this stage is very good news for a few reasons. You have ongoing and significant customer demand for your products and services.
You can now very confidently show investors there is high value in your company. Their investment in your enterprise will probably result in serious positive ROI, through shareholder dividends or capital gains.
What is Series B Funding?
Essentially, the only real difference between series A and Series B is the order they are in.
In reality, though, the qualifiers for Series B financing are oriented around some unique characteristics.
If you happen to be in the high-tech industry you will possibly require even more money. Hgh-growth niche markets tend to appeal to new investors wanting to achieve fast and substantial yields.
Your investment may be less about growing in existing markets since your business is fairly mature. You may be looking at new markets and new growth opportunities by adding to your products and services to new users there.
Getting Series B Funding
Just as in A Series, you must credibly demonstrate to potential investors that you have a rational, accurate valuation of your company’s worth.
However, your growing company has possibly captured terrific market share, so you might decide to reevaluate how to value it.
Hypothetically, rather than base the valuation on future orders or calculations of future value, it may be preferable to take advantage of a stronger position based on current data like assets owned by your company.
Together with the ongoing new growth, your recalibrated valuation may be significantly larger and more interesting to investors who want to fund Series B opportunities.
At this investment stage if you achieve a higher valuation you should not have to give up as much of your company equity in exchange for the amount of investment you are seeking.
Developing a successful product and building a good team demands acquiring top-level talent. The costs of up product development, sales, marketing, infrastructure, support, and staffing costs a lot of money.
Currently, the average Series B round capital raised is about $33 million. Companies seeking Series B funding are well-known in their market, and the corresponding valuations show that; most Series B companies enjoy valuations from about $30 million to $60 million, with an average of $58 million.
Series B rounds appear to be roughly the same as Series A when comparing funding activities and main participants. Series B is frequently driven by most of the same people as the previous round, including the main anchor investor, which attracts new investors. The main contrast between Series A Series B is the inclusion of a new group of capital investment companies that have mastered later-stage funding.
Series C Funding - Rapid Scaling
Enterprises that advance to Series C funding are already successful companies. They look for more funding to help them develop new products, grow into new markets, or even to buy other companies. In the Series C stage, investors put capital into obviously successful businesses, in an effort to receive more than double the investment back. Series C investment is intended to scale the company as rapidly and successfully as possible.
One way to grow a company very fast could be to acquire another company. Consider a startup already focused on creating electric vehicle alternatives to petroleum-fueled cars and trucks. When this company looks for a Series C funding capital investment, it has probably already proven unparalleled success at selling electric vehicles in North America. The business has likely already achieved impressive sales targets from coast to coast. Through their own solid market research and business planning, investors have educated confidence that the business would do well in other specific world markets.
Possibly this electric vehicle startup has a competitor who currently enjoys a good share of that market. The competitor may also have a competitive selling proposition that will benefit the startup. The corporate culture seems to be compatible and investors and founders believe their merger would be a highly beneficial partnership. Here, Series C funding would probably be used to purchase the other company.
As a company’s operation grows and becomes obviously less risky, additional investors will become interested in offering capital. Series C groups like hedge funds, private equity firms, investment banks, and big later stage market groups are added to the type of investors described above.
The rationale is the company has already established its high-performing business model; the Series C investors expect to invest large amounts of capital in enterprises that are already performing well as a way of securing their own positions as successful business front-runners.
Series D and E
Usually, a company will stop using outside equity funding with Series C. But, some will move on to Series D and even Series E rounds of funding too. Normally, though, companies attracting hundreds of millions of dollars in capital through Series C rounds are then fully ready to develop on a worldwide scale.
Many firms use Series C funding to bolster their valuation to prepare for a possible IPO. At this juncture, a company’s valuation is normally well over $100 million, but some go through Series C funding with many multiples of this.
Companies that move on to a Series D round are doing so to achieve a final push before an IPO or, they have not yet been able to achieve their Series C business goals yet
Conclusion
Knowing the difference between these stages (rounds) of attracting investment capital will help you interpret startup media reports and assess new prospects. The various rounds of investment function in the same basic way; investors provide capital for equity in the business. Between the funding stages, investors make new and more financially consequential demands on the startup.
Companies will have different case studies with different risk assessments and maturity levels at each stage of funding. But, seed investors, as well as Series A, B, and C investors all greatly assist business models to come to fruition.
Funding stages enable investors to assist entrepreneurs with the appropriate capital to carry out their visions, both hoping to cash out together in a very successful IPO.
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