Understanding the Different Startup Funding Stages

Mar 2, 2018

When you’re thinking about getting into the startup world, securing funding can be a crucial part of your business plan.

Since nine out of every ten startups fail, the investors and VC’s you work with can make all the difference if you want your startup to land in that coveted 10%.

Statistics gathered by Entrepreneur, however, show that funding isn’t only coming from angel investors and big industry names.

In fact, the study shows that about 38% of startups get funding from friends and family, while 57% are financed almost entirely by loans and lines of credit.

Want to make sure you get the funding you need from the places you want?

Keep reading to understand the startup funding stages you can’t afford to miss.
 

1. Seed Funding

Phase one in the startup funding stages is known as “seed funding.” In a nutshell, seed funding is the very first little bit of cash you get from the people and places that pretty much everyone else relies on, too.

This is the time to open up a new line of credit, take a serious chunk out of your personal savings — and encourage the other founders to do the same.

Yes, the seed funding phase is also when you’ll want to get on the phone to mom and dad, your rich uncle, and mine your circle of friends and networking contacts for cash.

Keep in mind, however, that this funding needs to come with serious incentives for your earliest investors. This will show your determination and will encourage your seed investors to stick with you in the future.

For example, you could offer interest payments, future stock in the company, or percentages of services. Always show your seed investors your long and short-term business plans, and pitch your family and friends the same way you would an angel investor.
 

2. Meeting With An Angel Investor

After you’ve created your prototypes, hired more people on your team, and even created a marketing plan, it’s time to move to the next level. Of course, this also means that you’ll need more cash.

Angel investors are high net worth individuals that will take money from their own pocket and invest that cash into your startup.

As such, you’re going to want to ensure that you’re giving these investors your most tightly-crafted pitch. You’ll also need to have some form of revenue at this stage, in order to come to them with realistic growth expectations.

Focus on showing these investors how you’ve put the money you’ve already received to good use, and they’ll be much more likely to invest with you.
 

3. Funding From Venture Capitalists

Enter the famous VC’s, or venture capitalists, who will help your business continue to grow, serve a broader market, and perhaps get out of the debt you’ve taken on in earlier stages.

You should also expect for some of these VC’s to serve as either short-term or long-term advisors to your startup.

Why?

Because unlike angel investors, VC’s aren’t investing their own money into your startup — they’re investing the cash of others.

So, you’ll need to do a lot more regulatory and compliance legwork during this stage. The VC’s clients will expect them to turn a profit off of their investment, so be prepared to answer far more questions about your startups than in previous stages.
 

4. Bridge Loans And Mezzanine Financing

Even if you haven’t actually made a profit quite yet, when you reach the fourth option on our list of startup funding stages, you should already have a good amount of cash flow coming to your startup.

You may be interested in acquiring another company, or you may need cash to help you deal with a merger.

Whatever the reason, you need to be clear that the finish line — and profits — is well within reach. You just need one final push to get you there.
 

5. Make An Initial Public Offering

The final entry on our list of startup funding stages is the coveted IPO, where your startup will finally have the chance to go public.

Depending on the success of your startup, your investors may decide to sell off most or all of their shares, while others will choose to hold for a larger potential profit down the line.

Of course, keep in mind that you can offer future investors stock in your company– which is no longer a startup — to secure additional funding.
 

Conclusion

You now have a much better understanding of the main startup funding stages.

Remember that the better prepared you are, and the more thorough your pitches are at every stage, the more likely you’ll be to succeed.

Keep in mind that, according to your specific goals and the overall nature of your startup, these funding stages might look a bit different.

As long as you’re moving sequentially and methodically, you’ll be in good shape.

 


 

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