Regardless of which stage you are in the startup funding lifecycle, money is an absolute necessity. Whether you’re running your business, keeping your team happy, or even to keep the momentum going, your success depends on how you raise and use your funds.
In short, money talks. And understanding the ways in which you can gather funds at each stage of funding will help you in your startup journey.
Here are the stages of startup funding:
1. Seed Capital
Also known as the seed stage, this capital will be the earliest source of funds for your startup. It’s meant to help the business take off and is typically invested early on.
Seed capital usually involves investments by an investor but may also include your personal funds such as savings and credit cards. At this stage, investors normally comprise friends and family.
Nevertheless, an investment of this nature would still require some form of return for the investor. After all, nothing is free in life. In this case, an equity stake would normally suffice unless the investor states otherwise.
If these funding options aren’t viable for you, there are also other avenues to gather the moolah you need. These funds could come in the form of government grants and crowdfunding.
There’s normally some government grant in place to help young entrepreneurs with their startups. Often times, these funds may be targeted towards the youth.
Moreover, accelerators and startup incubators are also great options to gather your funds. For example, the Sarawak government has Tegas Digital Innovation Hub set up as a startup incubator for local youths. While other private accelerators include Y-Combinator, Techstars, and 500 Startups.
Basically, if you’ve got an interesting product, you can market it through these platforms to gather your seed fund. And if your product is well-received, you’ll likely gather enough support to carry your startup to the next stage.
Here are some of the most funded projects on Kickstarter.
2. Angel Funding
If all goes well, you’ll eventually need to grow your startup. You can achieve this by increasing funding towards development, marketing or even hiring new team members.
Angel investors would be your best bet to expand your operation. Though, we’d recommend that your startup has proven its track record before you seek out these investors.
Similar to the average investor, angel investors are individuals that provide funds to a business in exchange for some stake in the company. The only difference being, the money invested is a lot higher than in the seed stage.
As we’ve mentioned before, investors may include friends and family and angel investors are no different. You could seek out a wealthy relative or a friend that has the resources to help you out.
3. Venture Capital Financing
The next stage would be venture capital financing. At this point, your company will be provided with the resources to get to that next level of growth.
Your startup should now be profitable enough to garner the attention of venture capitalists (VC). Otherwise, VC fundings are only required when you plan to grow your business beyond the angel funding stage. Also, you’ll be able to receive multiple rounds of funding from investors in this stage. And investors may even offer to join your company to provide additional expertise.
However, before you proceed you’ll need to convince the VCs that your company is worth investing in. Expect due diligence from potential investors, and be prepared to answer a ton of questions. You are, after all, taking a huge sum of money from them so this is to be expected.
Once you’ve secured your investors, you’ll need to ramp up the company’s growth and progress. Frequent update reports are to be expected, and you’ll have to answer to your investors at all times.
4. Mezzanine Financing
This stage is also known as the mezzanine stage or bridge financing. Your company is now up and running, your sales are doing great, and your investors are fairly content.
The next step would be to grow and scale your company further. This is achievable by expanding to new markets, mergers, acquisitions, or by preparing for an initial public offering (IPO).
IPO, in particular, is the end goal for a lot of startups. Though, it depends entirely on which direction you would like your company to go. Also important to note, profits gained from the IPO would be able to cover the mezzanine investments made by your investors.
Thus, the choice is entirely up to you. How do you see your company performing in the future? And do you think going public is the best for business?
IPO may be great, but it’s not the be-all and end-all of startups. Nonetheless, if you’ve decided on expanding your company, then going public is one of the best options you have.
Ideally, investors would have recouped their investment along with additional profits at this stage. Some investors may even look to selling their stock to reap the reward for getting in early.
Once your company has gone public, you’ll also have more options to push your business forward. For example, company stock can be leveraged to attract top talent or to attract new investors to increase capital.
But remember, once you’ve gone public you’re no longer a startup. You’re in the big leagues now.
To reiterate, the stages of raising funds for startups are seed capital, angel funding, venture capital funding, mezzanine financing, and IPO.
Now that you’re up to speed, what are you waiting for? Get out there and don’t let your dreams be dreams!