How Start-Up's Fundraising Works

How Start-Up's Fundraising Works

One of the biggest problems in the startup community is to watch good ideas and good teams to go unfunded because the fundraising process isn’t friendly to first-time entrepreneurs.

Fundraising is a contribution to the ecosystem that does a masterful job filling in knowledge gaps and giving entrepreneurs the best chances of raising the capital they need.

As a founder you want to think about the right choices, which will help you ;

So we have two choices:

The Short Version

The fastest way to explain the fundraising process is this:

1. Get your company started and build some traction to make your deal look interesting.

2. Find the capital sources that actually make the most amount of sense for your business right now. (Hint: it’s not always a traditional investor.)

3. Develop an amazing presentation that blows investors away with your idea, team, traction, and preparation.

Companies that successfully raise capital do so because they convince others that their idea is going to be a winner. They do that by demonstrating traction to the right capital sources and proving they have what it takes to actually make a great company.

The Longer Version

The goal is to make this process a little easier by walking you through the fundamentals, setting your expectations, and identifying what preparation you’ll need to do in order to be successful.

1. Prep

Before you begin raising capital or even thinking about it, the first step is to get your company started. You’ll need to get incorporated, get a tax ID, set up a basic online presence, develop some collateral materials like a logo and brand items to look like a real company, and begin putting together your business plan.

Once that’s done, you’re ready to start getting “traction” in your business. Traction is simply forward progress on all fronts – finding potential customers, generating PR, recruiting key employees, and building an early prototype of your product. These are all the basic elements to show that you are actually starting a company, not just thinking about one.

2. Match

Once you’re up and running, then it’s time to start looking at capital options. There are lots of ways to fund a new company, including bootstrap capital (personal credit, savings, friends & family), debt (business loans, AR financing), and of course equity

(angel investors, venture capitalists).

We’ll take a look at all these options so you can decide not only which you would prefer, but which you’re most likely to be eligible for.

3. Pitch

Now that you’ve figured out which capital sources make sense for your business, the last step is to begin your pitch process. At this point, you’ll need to put together each of your key pitch assets: your elevator pitch, pitch deck, and business plan.

With these items in hand, you’ll begin to systematically reach out to and pitch each capital source you’ve identified.

Summary

The fundraising process can be broken down into three main steps:

(Preparation, Matching, and Pitching).

It is important to complete all of the steps if you are serious about raising capital.

The preparation stage

is where you create the foundation for your company and generate traction.

The matching stage

is where you identify the best type of capital for your situation.

The pitching stage

 is where you present your opportunity to Investors.

It is always great when one can fund their startup business with their own money.

And in the initial stages, this is preferred by many startups as it involves lower risk to the business, even despite the cost borne by the founder or founders. But as startups start to grow in size and expand their business, venture capital funding becomes a must. And this is where startups start looking for investors for series funding round.

Series funding for startups refers to the different stages of funding, which help a startup stand on its feet, develop business, widen the market and upscale to reach the point of IPO offerings or acquisition by bigger companies. Series funding investments, hence, play a key role in a startup’s success.

The stages of funding are classified according to their utilization, starting with pre-seed funding. This is the money raised to do initial market research and make plans to realize the idea. seed funding raised to launch the business, set up the infrastructure, hire employees and start the production.

Next in line are Series A and Series B funding, which are meant for the growth stage of the business, and Series C funding is for rapid upscaling at a later stage. Furthermore, if extra money is needed, startups also raise sub-funds like Pre-Series A or extended Series A.

Types of Series Funding For Startups

1. Series A Funding:

The venture capital investment made in initial years to help the startup develop its business is termed as Series A. After the pre-seeding investment to develop the business idea, seeding investment is made. The next step is laying the foundation of the business, setting infrastructure, hiring employees and market research, for which Series A funding is the capital invested. This fund is meant for the enterprises that are already earning revenue but are still in the pre-profit phase. The venture capital companies invest at this stage to help the startup develop its business and products, and grow the product to meet the increasing demand from markets so that it moves up the business curve. The aim of Series A investment, therefore, is to optimize business for the startup and help it reach the status of unicorns.

1. Series B Funding:

The next stage venture capital investment is called Series B, which intends to support the startup in building its market base. Past the Series A funding, the enterprise is at a point where it has satisfied its existing customer base and has assured investors of its ability to increase its profits. Thus, Series B funding is meant to take the startup to a new level, expanding to other markets. This stage of funding, therefore, helps the company grow and earn higher profits.

3. Series C Funding:

This type of funding, provided to help the startup upscale, maximise profit and reach the level of IPO offerings or acquisitions, is termed as Series C. At this stage, the startup is already successful, expanding to markets and growing the product base. This is the time when venture capital companies look to inject money further, to ensure getting good returns from the investment made. Hence, Series C funding aims to upscale the startup at a quick rate to ensure fast-paced and maximised returns.

4. Pre-Series A or Extended Series A:

There are certain sudden requirements that are raised through sub-funds like Pre-Series A or Extended Series A. These are raised between Series A and seed funding, and Series A and Series B funding. Sometimes startups are past the seed funding stage but not in a position to convince investors or VC firms for Series A funding. Here, the follow-up money required to push the revenue higher is raised through mid-round funding called Pre-Series A.Extended Series A funding refers to the case when Series A funding has already been raised and the company has started earning a profit. Here, the startup might require additional money to reach the stage of raising funds for expanding to other markets. This mid-round is termed as extended Series A funding of a startup.

How Startups Can Raise Series Funding 

With the stages of series funding and their work processes identified, the entrepreneur now needs to know the ways to get series funding and invest it accordingly.

Raising Series A Funding: 

Venture capital firms seek entrepreneurs with great ideas and a powerful strategy to transform the startup into a profitable business to invest for Series A funding. So if an entrepreneur has a unique idea with the potential to succeed in the market, has started earning revenue with a clear vision of how to take it towards profit, he can approach VC firms. But to convince the investors, the startup needs to prove on paper that it is a working business with huge possibilities of making profits.

At this stage, where investing in startup remains a risky affair, venture capital investors tend to co-invest. So, an entrepreneur needs to look for an investor with a high reputation to act as the anchor investor who will attract other investors to rely on the startup and invest together. The collective fund, thus raised, helps the entrepreneur to start making profits. As per the industry estimates, the average Series A funding in 2019 reached around $13 million with the startup’s pre-money valuation being $22 million.

How To Reach Investors For Series Funding

Reaching investors for Series A, B, C funding requires the business to keep rolling and increase in valuation until they reach the level of convincing investors at the respective stages. For example, for Series A funding, a startup must have sold the first class of its preferred stock.

Next, Series B funding needs the business to be a unicorn that is ready to shift from its current customer base and expand to other markets. For Series C, the startup must have grown and it is now time to upscale to the point of IPO offering, merger or acquisition. But at each stage, apart from the specific company valuation levels, the startup also needs the entrepreneur to be at his convincing best. The entrepreneur should have good communication skills, along with a good business pitch, clearly stating the way forward for the business, and illustrate the idea through data, document and balance sheets to support the current status and claims.

Pros And Cons Of Raising Equity Funding 

With opportunities, come challenges too. The benefit of raising equity funding in series funding rounds that the entrepreneur doesn’t need to pay back the money.

So if there is a loss, there won’t be extra pressure on the business to repay debt funding or loan. But the investors too would like to earn from the returns and secure themselves.

This creates a disadvantage for the entrepreneur as he gets the money against company equity. Therefore to secure returns from the investment, the investors or the VC firms keep interfering in the business decisions and strategies of the startup, thereby snatching autonomy from the entrepreneur over his own business.

Series funding acts as a stairway to success in a startup’s journey.

Finally, the entrepreneur plays a key role in implementing the idea and carrying on with the effort to utilize the funds effectively and efficiently.