A startup is a new business that is potentially fast growing and aims to fill a hole in the marketplace by developing and offering new and unique products, and solutions to ease the pain points of potential customers. Funding is an important aspect of growth for startups because in most cases, founders do not have sufficient capital to grow their businesses. External funding from investors is needed to scale a small business into a household name.
Investors are enticed by the growth and profitability potential of new entrepreneurs but are also cautious about who they invest in. Founders have to go experience various rounds and types of funding to become a stable company and a potential household name either by becoming a unicorn or being publicly listed.
Funding Stages
The adage that 90% of startups will fail, is an accepted truth for most entrepreneurs. Lack of funding turns out to be one of the common reasons, as money is the spine of any business. The long, painstaking yet exciting journey from the idea stage to a revenue-generating business needs a fuel named capital. This is why, at almost every stage of the business, entrepreneurs find themselves asking – “What are the funding opportunities for my startup?“
The usual funding stages are:
1. Seed Funding
It is the research phase and initial round for funding investments here are generally made by:
People that are known to the founder like friends or family
Angel Investors to whom a stake in the company is offered for capital.
2. Series A Funding
When the startup has launched its product commercially, venture capital firms get involved and Series A funding is used to:
Establish a product in the market and take business to next level
Make up the shortfall of the startup not yet being profitable
At this point, investors from previous stages seek an exit and the focus shifts toward the company’s prospects instead of the idea of the founder.
3. Series B Funding
For when the startup needs to expand, either with staff growth or make acquisitions and grow. The investments in this round are usually driven by the same investors in Series A. Additionally, late-stage investors may be interested. Funding is usually used for hiring talent, marketing & advertising, and other areas of operations. Series B funding is the base to launch a startup towards the stratosphere.
4. Series C and Above
When a startup reaches this phase, it indicates that the organization has an established customer base, operations are less risky, and the next step for them to internationalize, or even diversify its product lines. By this time, venture capital funds seek to make an exit and the likes of hedge funds, private equity funds, or investment banks look to invest to drive returns.
Alternative Types of Funding:
1. Venture Debt
When a startup is fully established, it can raise money through a loan or debt. Venture debt is typically targeted at high-growth companies, and is meant to fund acquisitions or capital expenses or act as a bridge for the company to raise the next round of equity.
2. Bridge Loans:
Short-term debt acquired to finance IPO, LBO, paid back with the proceeds of the Initial Public Offering (IPO) or Leveraged Buyout (LBO).
3. Leveraged Buyout (LBO):
A leveraged buyout is the acquisition of another company using a significant amount of borrowings. These are in the form of loans or bonds. The goal of an LBO is to use the acquired company's assets to generate enough cash flow to pay off the debt that was used to finance the transaction and also to generate a return on the equity invested by the acquiring company.
4. Initial Public Offering (IPO):
An initial public offering (IPO) is when the shares of a company are sold on a public stock exchange, where the public can invest in the business. An IPO occurs at the final stage of the funding process, and the process is facilitated by investment banks, for a fee as well as incentives in the form of a stake in the company. Once public, the company now has all the makings of a household name. If the IPO goes well, brand value, reputation, and goodwill are enhanced.
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