Before you start the process of raising funds for your business, you need to take care of two things. Firstly, ensure that you have a solid financial plan which is the handful when seeking investment from angel investors, venture capitalists, financial banks, ledgers etc. Secondly, startup funding depends largely on the nature and the type of business, so make sure that raising funds is aligned with the short term and long term goals of your company. Also, for taking your startup to the next level, you should know the Funding Stages that you want to go for, and for what purpose. Such decisions made at the right time can be a boon to your business.
1) Seed Capital
Seed money or Seed capital is required when a business is getting started. This initial money generally comes from the co-founders, family or friends. The money is mostly used for covering initial operating expenses to conduct market research, product research and development (R&D) and business plan development and attracting venture capitalists.
Seed capital funding is considered high-risk for investors because the business is not fully functional and has no track record. However, one can also look for seed funding from investors who offer seed capital in an exchange stake in the company.
2) Angel Investor Funding
An entrepreneur sometimes runs out of money and they need to tap wealthy people outside their friends and family circles. These people are called “Angel investors”, or an affluent individual or groups of individuals who invest money or equity financing in start-up or early-stage small businesses in exchange for convertible debt or ownership equity.
Angel investors usually provide private equity or second-round funding for growing, profitable small businesses who need money to continue to grow. Some institutions also offer capital ‘pre-series A round of funding’, which helps a startup to get prepared for the VC funding.
3) Venture Capital Financing (Series A, Series B, Series C, Series D Rounds, etc.)
Venture capital is required once the company completes the beta phase and final products or services are being used by customers. With the new funds, the company wants to acquire the potential market.
Depending upon the plan and requirement, Venture Capital financing involves multiple rounds of funding such as Series A, Series B, Series C rounds, etc to support the growth of startups.
Series A Round: Series A investment is provided to execute a specific plan. It is mostly used for marketing and improving your brand credibility, tapping new markets and helping the business grow.
Series B Round: This round of funding is used for taking businesses to the next level by refining the products, growing team members across departments such as business development, sales, advertising, tech, support, and other people. It also helps a business in paying salaries, improving the infrastructure and establishing it as a global player.
Series C Round: Series C investment helps startups to scale the business and grow bigger, or help in some other business acquisitions. This is not the end, a startup can receive as many rounds of investment as possible, there is no certain restriction on it.
4) Mezzanine Financing & Bridge Round
These kinds of funds are required if startups are looking for initial public offering or acquisition of their competitor or a management buyout. To pursue such opportunities, they can go for mezzanine financing or “bridge” financing round. Mezzanine financing is often used 6 to 12 months before an IPO and then the IPO’s proceeds are used by the company to pay back the Mezannine financing investor.
5) IPO (Initial Public Offering)
This is when the startup is mature and wants to go public by selling its shares to the public. It’s also referred to listing your company publicly on the stock exchange which brings more credibility. If a firm convinces people to buy stock in the company, it can raise a lot of money.
The IPO is seen as an exit strategy for the company founders and early investors to profit from their early risk-taking in a new venture. Therefore, in an IPO many of the shares sold to the public were previously owned by those founders and investors.
Confused between Debt and Equity financing?
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