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March 9, 2017

How Startup Funding Works

Owning a startup is the new cool nowadays and almost everyone is creating their own startups. It seems like being an entrepreneur in this era is cooler than being Bruce Wayne. Jokes aside, if you have watched the brutally honest show Silicon Valley or you belong to the tech scenario, you might have a few questions in your mind regarding startup fundings. Creation of a startup brings many challenges along with it and money is the biggest one. However, as hard as it sounds, most of the startups end up getting an investment. As the CEO of a fresh company, how would you get an investment for your startup? Don’t worry we have explained the whole process for you! Oh, but remember one thing…

 

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Stage 1: Bootstrapping

Bootstrapping is the opposite of fund raising. Bootstrapping takes place on the initial stage of a business when you and your co-founder invest money out of your own savings. At this point, you are the sole owner of your business and developing your idea to create a realtime value out of it. In other words, there is no outside investment but the proprietor owned money. Startups can grow by reinvesting profits in their own growth if bootstrapping costs are low and return on investment is high. At times, this financing approach enables the owners to be in charge of their own business and focus on providing the best to their customers rather than board meetings with the investors and VCs.

 

Pros: By self-funding, only you will be answerable to yourself. The navigation of the company will be in your hands and you can choose if you want to be acquired or not!

 

Cons: One of the biggest setbacks in bootstrapping your startup is the revenue and it can be hard if you are bootstrapping. Secondly, VCs and Angel Investor don’t just give you the money. They introduce you to the right people.

 

Stage 2: Seed Funding

The seed stage of any startup is purely embryonic. Seed Funding is an important phase because the external financing starts with it. Seed Funding takes place when the business owner realizes that he/she needs more money to keep the gears running and cover the expenses until the business starts to generate revenues. As the name implies, seed funding is a small amount of money that you take from your friends, family or small seed/angel investors.

 

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Why the amount is small? Because it’s risky to put a large sum of money into a startup whose potential is yet to be discovered. Seed Funding helps solving the initial challenges a business faces, like getting an office, domain registration, cloud services etc. Many Seed Funding firms even provide incubation, startup acceleration and investments in return for the equity.

 

Pros: Your friends and family will listen to your pitch and are inclined to say “Yes”. They can give you the required time to build your business and run it on your own pace.

 

Cons: You might feel more than responsible if any damage incurs. You may damage your close relationships.

 

Stage 3: Angel Funding

When you’re on this stage, know that you’re on your way to series a, b, and c investments. As your business will grow, you will need more resources, a bigger office and other services as well and this is where an Angel Investor kicks in. Unlike Seed Investors, Angel investors don’t invest in companies only after considering the valuation and future prospects of the business. They take a share of equity but provide you money enough to keep your engine warm and create your product ready for the launch because usually, you meet angel investors before the launch of your product. They are like catalysts, they pace up the reaction that creates the product.

 

Pros: In this stage, you have a high burn rate and because of that, your seed funds are reaching lows. This is why they are called Angel Investors because they help you like angels when you need their money the most!

 

Cons: There is only one con and that is equity. Like seed funding, an angel investment is not a huge amount of money and getting a small pile of cash for equity is not a wise choice for many.

 

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Stage 4: VC Funding

Venture Capitalists (VC) are specialized financing firms which invest in startups who have the potential to make money. VCs just don’t give you the dough, they provide legal and marketing expertise with a good team (mostly) and unique selling point (USP) as well. Venture Capitalists analyze your company on the basis of your product’s potential, the progress you’ve made so far, the skillset of the founder team, your market competition and the risk involved in your business.

 

VCs don’t pay you small chunks of money, we are talking millions here but to persuade a VC requires your product to be a potential one because VCs know the market like the back of their hands. They know what’s in, they know the competition, and they even know the consumer behavior. The stage when you reach out to a VC is when you have already launched the product (mostly) and you have built your first version with a growing amount of users. CEOs often do this when they get money from the VCs. Never do that!

startup-funding-lessons-and-mistakes

 

There are various types of funds VCs provide on different levels of your business:

 

Series A Investments

Series A or Round A is the first stage of VC investment on your startup. In the Series A financing your VC gives you the money to promote your product or service(s) to your target market across geographical locations and create a working business model out of it. It is a critical stage for any newborn company, your presence is not fully established in the market and your are striving to make a difference. Series A funding is often misinterpreted for being the investment to run the operations of a company. No! It is only to scale up the business to the first level.

 

Series B Investments

Series B is the second stage of VC investment which happens when your company has been accepted in the market and has proven its viability and potential. The purpose of Series B investment is to face the competitors and get the market share in the first place which is essential for any startup. In this stage, your VC will offer you networking opportunities, build your PR and introduce you with the industry gurus.

 

Series C Investments and Beyond

The is the stage of investment when your VC has a dogmatic approach towards your startup’s success. Your company has captured a considerable chunk of the market, you are now looking to introduce a diversified range of products or services, acquisitions and the lion’s share of the market. VCs usually support these investment rounds because these round help to reach the breakeven and future milestones. This is the last round of investments before a company goes into an “Initial Public Offer”(IPO).

 

Here is an example of a good financial timeline of a startup (which is now a unicorn company).

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Stage 5: IPO (Initial Public Offering)

Okay, this is big. Not the end goal for all startups but the goal every startup wants to achieve. If you have been successfully through all the stages and you own a good market share along with a decent number of customers, you are ready for an IPO! As you have read the abbreviation above IPO means that you are ready to expand your company further and done with all the Angel and VC pampering. At this point, you’ll be selling your company’s stock to literally everyone in the world and your company will be leveraged to attract top talent and the higher access investments that can pace up the momentum of your business. All your VCs and Angel investors may retain their share and don’t be surprised if some of them sell their stock at the beginning to reap the rewards of getting in early, that’s normal. Oh, and once you are on the NASDAQ, stop calling yourself a startup. You are playing with the big boys now!

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Startups, Technology

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Aplos Innovations Funding Investments Startups VC

Comments

  • mushi

    Much needed explanations. Thanks

    What if a startup continues with bootstrapping?

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