Stages Of Investing In Startups

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Some Quick Ways To Raise Money For Your Business

Stages of Investment Funding || Startup Investment Series – 2

There are a few more ways to raise funds for your business. However, these might not work for everyone.

Product Pre-sale: Selling your products before they launch is an often-overlooked and highly effective way to raise the money needed for financing your business. Remember how Apple & Samsung start pre-orders of their products well ahead of the official launch? It is a great way to improve cash flow and prepare yourself for consumer demand.

Selling Assets: This might sound like a tough step to take, but it can help you meet your short-term fund requirements. Once you overcome the crisis situation, you can again buy back the assets.

Business credit cards are among the most readily available ways to finance a startup and can be a quick way to get instant money. If you are a new business and dont have sufficient money, you can use a credit card and keep paying the minimum payment. However, keep in mind that the interest rates and costs on the cards can build very quickly, and carrying that debt can be detrimental to a business owners credit.

If you need legal assistance for your startup, contact us.

Origins Of Angel Investors

The term “angel” came from the Broadway theater, when wealthy individuals gave money to propel theatrical productions. The term “angel investor” was first used by the University of New Hampshire’s William Wetzel, founder of the Center for Venture Research. Wetzel completed a study on how entrepreneurs gathered capital.

Friends Family And Self

Before anyone is willing to invest in you, typically, businesses receive their very first initial seed capital from friends, family, or the founders bank accounts. It is usually quite challenging to convince investors to invest in something that doesnt exist. To get your company off the ground, develop the business plan, and so forth, youll typically need funds from a close source that knows you well.

At the very beginning, the initial investment tends to be quite small. You might receive a $20,000 check from a friend or put $50,000 of your own money in the business. The objective at the first formation stage is to get everything in place so you can start your business and start developing a prototype.

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Stages Of Startup Funding:

The five different stages of startup funding are as follows,

1. Seed Captial

Your seed capital is primarily one of the earliest investment sources. For getting your seed capital, you need to depend mostly on personal savings, credit cards, crowdfunding, friends, and family.

No matter who you get the seed capital from, just make sure you keep your promises clearly define what are the tangible deliverables. Now, if you have been smart and invested in Cryptocurrency, then you can also use that for your startup funding.

2. Funding by Angel Investors

You need angel investors, and these investors need a good, lucrative pitch. Angel investors are people with net worths of a minimum of 1 million dollars. The second round of funding starts when you know you need more money to expand your teams, marketing, advertising, and the like.

Since the money that can be expected to raise at this stage is higher than seed capital, and as a result, remember that investors will expect compelling returns.

Read more:Things To Remember While Mentoring Startups.

3. Financing by Venture Capital

Venture capital comes in the third stage in this process of investment. Here you need the money for expanding the marketing budget, finding new business channels, and investing in customer budgets.

Venture capital firms regularly support startups. As long as you make a compelling and lucrative pitch, you can have them by your side.

4. Bridge Loans
5. Initial Public Offering

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The Process Of Series A Financing

Portage Ventures is seeking to raise $1 billion for its new fund to ...

After a start-up, lets call it XYZ, has established itself with a viable product or business model, it may still lack sufficient revenue, if any, to expand. It will then reach out to or be approached by VC or PE firms for additional funding. XYZ will then provide the potential Series A investors with detailed information on their business model and projections for future growth and revenue.

Typically, the funds sought would be used to proceed with expansion plans . The funds can also be used to pay out initial seed or angel investors.

The potential Series A investors will then perform their due diligence and then form a decision about whether to invest or not. Remember, this is a high-risk enterprise, as many start-ups dont make it. If they decide to invest, then it gets down to the nitty-gritty: how much to invest, what will they get in return, and other conditions covering the investment.

In exchange for their investment, typical Series A investors will receive common or preferred stock of the company, deferred stock, or deferred debt, or some combination of those. The entire investment is premised on the valuation of the company, how much it is worth, and how that valuation may change over time. Most Series A investors are looking for significant returns on their money, with 200% to 300% not uncommon objectives over a multi-year period.

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What Are The Different Stages Of A Startup

A typical startup journey has three stages ideation, growth, and expansion

The average time taken by a startup to reach unicorn status was nine to ten years in the last decade. This has come down to six years in the past two years

Every stage of a startup is unique and comes with its own set of challenges. The startups that can push smartly through these challenges tend to make it big in the Indian startup ecosystem

A typical startup journey has three stages ideation, growth, and expansion. At each stage, startups tend to perform a wide range of activities that help them grow. Every successful startup aims to minimise the time taken to advance from one stage to the other.

Recently, we have seen this happening in the Indian startup ecosystem. There have been unicorns coming out every month in India today. In the previous decade, the typical time for a startup to become a unicorn was nine to ten years. It took 11 years for both Dream11 and Druva to hit the billion-dollar valuation. This has come down to a whopping six years in the past few years. Startups such as Swiggy and Mensa have changed the startup ecosystem by attaining unicorn status in record time.

Stages Of Startup Investments

Investing can be broken down across several stages of startup funding. These stages are the pre-seed stage, the seed stage, and then on to Series A, B, C, and beyond. The stage a startup is currently in relates to how to invest in startups. While early-stage companies can be invested in as angel investors or through crowdfunding, later funding rounds are often raised from venture capital and private equity companies, and it can be difficult for non-accredited investors to invest in these stages of startup investment.

Pre-Seed FundingThe Pre-Seed Stage refers to the earliest days of a startup before any major funding is raised. At this stage, startups are usually still working on their idea and just beginning to develop their product and/or service. The majority of pre-seed funding raised by startups is raised from startup founders’ families and friends. However, more and more startup incubators, accelerators, angel investors, and venture capitalists have become increasingly willing to invest in pre-seed ventures hoping to strike gold by investing early.

Recommended: For more on the stages of a startup, read our article on Stages of Startup Funding.

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Stages Of Startups And Source Of Funding

There are multiple sources of funding available for startups. However, the source of funding should typically match the stage of operations of the startup. Please note that raising funds from external sources is a time-consuming process and can easily take over 6 months to convert.

This the stage where the entrepreneur has an idea and is working on bringing it to life. At this stage, the amount of funds needed is usually small. Additionally, at the initial stage in the startup lifecycle, there are very limited and mostly informal channels available for raising funds.

How Startup Investing Really Works

Seed Funding for Startups: How to raise venture capital as an entrepreneur

A few people get together and come up with an innovative solution to a common problem. They test out their new solution, iterate a little, and find something that works and that a sizable group of people actually want to use.

Inspired, this band of innovative thinkers decide to turn that early idea into a company. But to fulfill that dream, theyll need advice from seasoned entrepreneurs who have built successful companies before. And money.

This is where startup investors come in.

In Silicon Valley and beyond, early-stage startups can raise venture capital from VC firms and angel investors in various ways .

Were going to explore the different types of early-stage investments that give promising startups the cash flow they need to start chugging toward that IPO, and when investors are likely to encounter each investment type.

Equity investments and convertible investments are both securities, or non-tangible assets for example, shares of stock in Apple or a government bond.

There are two main ways to invest in early-stage startups:

  • investing in a priced equity round: investors purchase shares in a startup at a fixed price
  • investing in convertible securities: the investment amount eventually converts into equity

Seed and early-stage investors often invest in startups via convertible securities, such as convertible notes and Y Combinators SAFE documents. Investors in later-stage startups will more commonly invest in priced equity rounds.

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Series D Funding And Beyond

There are usually two reasons a startup goes past the Series C funding round. They are:

  • New opportunities: A potentially lucrative opportunity appears that requires the company to act before the Initial Public Offering .

  • Subpar performance: The startup misses the goals set during the Series C round of funding. It then raises more funds in the Series D round to address the issues.

There is no limit to how many funding rounds a startup can go through. If a company has more advanced revenue goals, it may complete as many fundraising series as necessary.

Example: Anya planned to take her business public at the beginning of December. However, a competitor in her industry came up for sale in November. She decides to raise Series D funds to purchase the competitor instead of proceeding with the IPO.

How Series A Funding Works

It is increasingly common for companies to use equity crowdfunding in order to generate capital as part of a Series A funding round. Part of the reason for this is the reality that many companies, even those which have successfully generated seed funding, tend to fail to develop interest among investors as part of a Series A funding effort. Indeed, fewer than 10% of seed-funded companies will go on to raise Series A funds as well.

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Investing In Startups Through Venture Capital

Another way to invest in startups is through venture capital. Although most venture capital firms only raise capital from high net worth individuals, endowments, foundations, pension funds, and trusts capable and willing to make significantly large investments, there are opportunities for both accredited and non-accredited investors to invest venture capital in startups.

Some alternatives for the average investor to invest in startups are publicly traded funds such as Small Business Investment Companies , Business Development Companies , and Private Equity firms. Some of the biggest publicly traded firms in these spaces include:

How Does Startup Funding Work

Early

There is a brilliant business plan that wants to take off. Friends, family, and the founders own financial resources have helped the company grow steadily. As the companys customer base expands and its operations and objectives evolve, so do the companys resources. When the time came to raise new offices, staff and even consider an initial public offering , the companys value had quickly surpassed that of its competitors.

Most successful startups have raised capital through multiple rounds of external funding, except for a few lucky ones that grow using the above model . Outside investors can participate in a companys growth by putting money into the company in exchange for a equity in the company. As a business grows, so does the amount of money it receives from investors.

Depending on the industry and investor interest, startups may be eligible for additional funding rounds. Angel investors are a common source of seed funding for new businesses. If necessary, Series A-C rounds and other efforts to raise capital can follow these funding rounds. One cannot rely solely on the generosity of ones friends, family, and ones own savings to sustain themselves.

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What Is Series B Funding

Series B rounds are all about taking businesses to the next level, past the development stage. Investors help startups get there by expanding market reach. Companies that have gone through seed and Series A funding rounds have already developed substantial user bases and have proven to investors that they are prepared for success on a larger scale. Series B funding is used to grow the company so that it can meet these levels of demand.

Building a winning product and growing a team requires quality talent acquisition. Bulking up on business development, sales, advertising, tech, support, and employees costs a firm a few pennies.

Whats An Angel Investor How Does Series Funding Work Whats The Best Way To Land Investment From A Venture Capital Firm Is Crowdfunding Actually Legitimate Let’s Explore 5 Of The Most Common Types Of Startup Funding Together

July 23rd, 2022 | By: The Startups Team | Tags: Crowdfunding, Angel Investing, Venture Capital , Growing a Business

When it comes to types of startup funding, there are a lot of options to consider.

Startups in the early stages need to raise funds to survive past the business idea but looking into all the types of funding can be overwhelming to a budding entrepreneur. If youâve never heard about seed funding, equity stake, or venture capital funds, we are going to dive into how to raise funds for startups, and the difference between all the funding sources out there.

So, what do all the types of funding mean? What are angel investors? How does series funding work? What does equity funding entail? Whatâs the best way to land an investment from a venture capital firm? Is crowdfunding actually legitimate? Is external funding the best option?

As Startups.com Founder and CEO Wil Schroter likes to say, âThereâs no âfunâ in funding.ââ But it doesnât have to be terrifying, either. There are many different funding options to navigate in the early stages of a startup.

Let’s explore the five most common types of startup funding sources, with links to more detailed explorations of each type of funding.

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Valuation: What Is My Company Worth

You are two hackers with an idea, a few months of hackings worth of software, and several thousand users. What isyour company worth? It should be obvious that no formula will give you an answer. There can only be the mostnotional sort of justification for any value at all. So, how do you set a value when talking to a potentialinvestor? Why do some companies seem to be worth $20mm and some $4mm? Because investors were convinced that was whatthey were worth. It is that simple. Therefore, it is best to let the market set yourprice and to find an investor to set the price or cap. The more investor interest your company generates, the higheryour value will trend.

Still, it can be difficult in some circumstances to find an investor to tell you what you are worth. In this caseyou can choose a valuation, usually by looking at comparable companies who have valuations. Please remember that theimportant thing in choosing your valuation is not to over-optimize. The objective is to find a valuation with whichyou are comfortable, that will allow you to raise the amount you need to achieve your goals with acceptabledilution, and that investors will find reasonable and attractive enough to write you a check. Seed valuations tendto range from $2mm-$10mm, but keep in mind that the goal is not to achieve the best valuation, nor does a highvaluation increase your likelihood of success.

What Are Funding Rounds For Startups

Valuation of Early Stage Startups (Part 1) – Overview for Investors | Crowdwise Academy (315)

There are other types of funding rounds available to startups, depending upon the industry and the level of interest among potential investors. It’s not uncommon for startups to engage in what is known as “seed” funding or angel investor funding at the outset.

Next, these funding rounds can be followed by Series A, B and C funding rounds, as well as additional efforts to earn capital as well, if appropriate. Series A, B and C are necessary ingredients for a business that decides bootstrapping, or merely surviving off of the generosity of friends, family, and the depth of their own pockets, will not suffice.

Below, we’ll take a closer look at what these funding rounds are, how they work and what sets them apart from one another. The path for each startup is somewhat different, as is the timeline for funding. Many businesses spend months or even years in search of funding, while others may bypass some of the rounds of funding and move through the process of building capital more quickly.

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