The life of an entrepreneur is never dull. Crazy ideas fill the room as you work to change the world. Tensions run high as you approach the nerve-racking product launch. The immense sense of joy and achievement when you look at adoption rates and the positive reviews that come in.
The journey of your startup’s funds is just as eventful – the giddying potential after a fresh injection of funds, and the looming despair when the war chest runs dry.
As a founder or entrepreneur, it’s important to have a clear vision of your company’s journey and the funding required at each stage. We look at the funding lifecycle and highlight the different stages before the eventual end-goal of the initial public offering.
The Seed Stage (or Angel Round)
The birth of the idea. This is when you conceive your big hairy audacious goal, and you try to convince others to rally behind your vision. No figures, data or projections. Just a dream for a better tomorrow.
For a select few well-connected entrepreneurs, an angel round of investment may come in before the seed stage (although some may classify angel rounds as seed stage funding as well). Angel investments tend to come from family, friends or ultra-rich individuals.
For traditional seed stage fundraising, potential funding usually comes in the form of an equity exchange at a very low valuation. Without any indication or evidence-based assurance that the idea is going to succeed, investors may attempt to short-change you in hopes of getting a good deal.
Since this is the very first stage of the lifecycle, startups would usually seek funding through more informal channels like crowdfunding platforms, lone angel investors, or wealthy family and friends. Seed investors can be a mix of individuals and institutions (venture capital investors may wish to get involved in seed but not in angel rounds). As a founder, it is up to you to decide how you would want to play it. Bringing VCs into the fray at the beginning may add unwanted pressure and stress. The funds raised at this stage are typically channelled into market research and product development.
Pre-A or Seed Plus
Didn’t get enough funding during your angel rounds and seed stage? This is quasi-stage of the funding lifecycle is becoming increasingly popular among startups. The Pre-A or Seed Plus stage is becoming a mandatory stage as the playing field becomes more crowded and companies are looking for that extra monetary edge over their peers.
Startups looking to raise a Pre-A or Seed Plus round of investment are generally to get a last bit of traction to raise the value of the company before moving on to Series A funding. With more funds committed to your business, the more attractive it will appear to other investors. Investors involved at this stage of the funding lifecycle are quite often it is the same people who invested during the angel round or seed stage. The purpose of this stage is to increase your company’s value before it begins expanding.
This is where things start to get official. You’ve developed your minimum viable product, gained some traction and generated some buzz in the press. The Series A stage is where you get your first substantial round of funding. Armed with hard evidence that point to potential success, you are now confident enough to face institutional investors.
At this stage, you will need to rely on much more than just an idea. Investors will be looking for a well-rounded business plan, potential for scalability, growth projections and company milestones. Since this is still considered a relatively nascent stage of your company’s growth, projections and growth plans will play a crucial role in obtaining funds.
If you’ve managed to get this far in your startup’s funding lifecycle, it’s a sign that you’re on the right track. This follow-up round of funding means that your company has raised enough interest in the community, increasing the pool of potential investors and the overall valuation of your company.
At the Series B stage, your product should already be available in the market, with a significant number of users on board. Investors coming in at this stage would generally be willing to fork out funding in the 6-digit range since your startup is now deemed to be less risky. Funds from Series B are commonly channelled into user acquisition and increasing market share.
Now you’re playing with the big boys. At this stage, your company is already generating significant revenue. With solid financials and ambitious growth plans, investors are now convinced of your company’s sustainability.
Series C investors may include private equity firms, depending on the levels of revenue that you are raking in. As confidence in the success of your company increases, the slice of equity you handout decreases. The funds generated from this round is usually used for expansion into new markets, product diversification as well as potential acquisitions and partnerships.
At this stage of the funding lifecycle, you and your investors are usually focused on the eventual exit via acquisition or initial public offering (IPO). It should be noted that many startups go on to have even more rounds of funding due to product pivots or changes in management and business strategies.
The Initial Public Offering
The final destination. The light at the end of the tunnel. This is the stage of the funding lifecycle that many entrepreneurs hope to reach, but may not have prepared for. This is when your company graduates from being a private establishment to a public entity. From startup to full-fledged corporation.
The process of a public listing is incredibly thorough, with many companies imploding under the pressure. This stage starts off with assembling of a team of lawyers, accountants, underwriters and experts in government regulations. This is when every single detail of your company’s finances, inventory, assets and business plans gets recorded. These details are then structured into a compelling saga of your business, otherwise known as an IPO prospectus. It’s time to air out your dirty laundry and clean out the skeletons from your closets – it’s called ‘going public’ for a reason.
After all the preparation, you’re not even halfway through the IPO process. The bulk of the work comes after your company sends its financial statements and prospectus for audits and reviews by governing and regulatory bodies. The filing for an IPO is followed by roadshows to generate investor interest, confirm potential backers and appoint financial institutions that will lead the public listing.
Going public is not only an avenue to raise large sums of money in a short time, it is also a testament to the success of your company through the validation from public markets. On top of this, the buzz generated from your IPO preparation will elevate your company’s profile exponentially.
While funding is imperative to the success of a startup, it is an endeavour that should be taken with caution. Raising successful rounds of investment doesn’t equate to success. It is how you use the funds that truly determines your clout as an entrepreneur. You need to remember that your company is your golden egg, not the funding. The more funding you receive, the more equity you’ll need to give away. At the end of the day, you don’t want to be left with a minority share when your company goes public.