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.

Founders who seek higher amounts of funding can expect a higher trade off. Investors seek equity, which results in dilution of ownership of the founders. This could range between 10% (a steal) to 20% (most likely) or 25% (too high). This is done keeping the valuation of the company at seed stage. A good business plan with projections of growth based on funds received are a good way to avail seed funding.

Previously, the number of companies who raised money in the seed round were few but increasingly investors are seeking to invest in the seed stage, thanks to the use of SAFE.

Series A Funding

In Series A funding, startups offer equity in exchange for funding, similar to seed funding. They issue preferential shares that allow investors to convert it to common stock at a set future date. Return on investment for funders are lower in series A than they are at the seed stage. The amount of funding a company raises in series A is determined by the valuation of the company and the due diligence process results.

Series B Funding

Companies that have achieved a steady revenue flow and are now ready to increase their market size and/or scale up their products seek Series B funding. The average funding achieved in this stage is substantially larger than that received in seed stage and series A stage. Increased customer demand prompts startups to go ahead with Series B funding. By this stage, the company is in operation and is not seeking funds on projections but on actual sales and pre-orders. Investors are keen to review a plan from startups on how the funds received will be allocated.

In series B funding, the emphasis is on criteria like sectoral comparison, project estimates, updated certifications and agreements. The expected valuation of a company seeking series B funding in the US for 20121 is US$40 million. The series B funding is considered the most challenging stage in startup funding.

Series C Funding

Series C funding is ideal for companies that are stable, profitable, and continue to grow. The investors who funded the company in series B usually fund them in series C too. Big hitters with lots of traction, swelling sales order books and expected continued high growth can avail series C funding.

Some of the conditions to seek out series C funding are new product development, the possibility of acquisition, plans to go to market for an Initial Public Offer (IPO) and an existing solid customer base that continues to expand. The number of companies seeking series C funding are few and many startups do not make it to this stage. This Series C in startups is called late-stage fund raising.

Most companies go for an IPO after Series C, although some startups seek series D and E funding from investors.

The data for startup funding in 2021 reveals 1282 startups went public in the US, with the top investor types being venture capital, corporate venture capital, private equity firms and family investment offices. These companies cumulatively went through 3,565 funding rounds raising $315.6B. The U.S leads with the highest number of startups followed by India, UK and Canada.

The startup pie distribution shows that 7.1% of the startups operate in the Fintech space, followed by life sciences and healthcare at 6.8% and artificial intelligence at 5% . 69% started as home businesses. Only 40% generated profits. 50% of the unicorns (companies that are privately held and valued at $1billion ) are placed in the US and 25% in China.

The three most highly valued private startups are Bytedance, Didi Chuxing and Stripe. The failure rates are very high with data showing that 9 out of 10 startups fail. 20% close just after a year, 30% within 2, 50% within five years and 70% within 10 years. One can see why investors are choosy about where they park their money.

This shows that despite a higher failure rate, many of the top companies of the world have sprung and thrived thanks to startup funding. Seeking startup funds can be tough but are worth pursuing to bring a business idea to fruition.