Five Stages of Venture Capital Funding

Startup entrepreneurs initially fund their business through their savings, collect contributions from friends and relatives to initiate their business.

They start seeking formal funding in the early stages of the startup to set up a strong base and eventually scale up. In different stages of the startup, funds are raised through investment rounds.

Startups need funding for their varying needs quite early on in the business cycle. They need funds for product development, hiring team members, legal and consultancy services, licenses and certification, sales and marketing, working capital and administrative space and charges.

In the next stage they need funds to consolidate. The next round of funding is usually used to expand their markets and product line. Eventually, they go public. The rounds of funding are broadly categorised as: pre-seed, seed, Series A, Series B and Series C funding.

Pre-seed funding

Pre-seed funding is the inception stage funding. Typically, founders put in their own funds and collect funds from their family. In some cases, companies seek formal funding from angel investors before an MVP (minimum viable product) is made or their advertised service is rolled out. In some cases, investors may see a prototype with a viable revenue model. If investors see potential, they invest in the startup at this very early stage. The funds obtained at this stage are generally used to reach the next stage.

Seed Funding

Seed funding is sought from angel investors and venture capitalists using convertible notes, SAFE or by offering equity. Founders who seek funding in the seed stage have to impress upon investors that their product has a clear target audience, a need for their product and demonstrate a steady increase in their customer base. The task to convince investors of these criteria is not simple and involves meeting different investors.

In the seed funding stage, companies look for funds to function for the next X months till they think they will achieve profitability. Startups calculate the funding amount required till the next round of funding.

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