Every company goes through different stages, with different challenges and needs. Raising capital will remain a constant challenge. As you hopefully grow from round to round you will meet different players, mindsets and requirements.
Don’t worry, however… we’ve got you covered from the very beginning to the IPO! 🚀
– Jeroen Corthout, Co-Founder Salesflare, an easy-to-use sales CRM for small B2B companies
Pre-seed
You just spent 3 months tinkering on your initial idea and convinced one of your friends to become a co-founder. Guess it’s time to go official and register your company. 🖋
Beyond picking an awesome name 😇, there are a number of decisions that need to be made to ensure your business is future proof and attractive to investors.
So go ahead and read up on the following items:
- Incorporation structure
- Licensing requirements
- Intellectual property
- Option pool for future employees
Your pre-seed round used to end right here, but as competition has been increasing at the next startup funding round (Seed), so have the expectations been growing.
Before being able to properly raise seed funding, expect to need a well-developed minimum viable product (MVP), a strong core team, early traction and great customer experiences showcasing the opportunity for your business.
Your pre-seed money will hence be used to get to the next startup funding round.
Investors in the pre-seed round are typically friends and family or business angels, with investments ranging from $50,000 – $200,000 for a 5% – 10% equity stake. They provide you with enough runway to develop your MVP.
Seed round
Did you just launch your minimum viable product? Did you manage to get your first users and customers? But did you also realise that it takes more capital to truly develop your initial product and prove your product market fit, so that you can really take off?
Then this is a great time to be reading about seed financing.
In the seed funding round, you raise capital from family and friends, incubators, angel investors or/and venture capitalists. This finances product development and initial market entry, with the purpose of proving product-market fit and initial growth.
Investments typically come in the form of equity or convertibles, so make sure to read up on these differences in our post about types of startup funding.
When is the right time to talk to investors?
Always, sort of. 😉
It is never to early to establish a relation with investors by having casual conversations on your business, the market opportunity, and what they are looking for in investments. Use this casual contact as immediate feedback that can be used at the time of fundraising.
Refrain, however, from full-blown pitches until you have gathered enough evidence to really convince them. Once you are ready, remember that investors need to be convinced that your idea is compelling, that there is an opportunity, and that you are the right team to execute.
For some founders, a story and their reputation might be enough. But for most of us, it will require a well-developed idea, a good understanding of the market opportunity, a minimum viable product, and some initial traction (take a look at comparable startups that raised funding as a benchmark).
Once you have all those ingredients, it is the right time to pursue an investment.
How much should I ask for?
In an ideal world, you would raise just enough money to reach profitability, while not giving away too much equity.
But this will hardly ever be the case, as for most startups there will be a need for a lot of follow-up rounds before reaching a self-sustaining growing business. 🤑
The key factor in deciding how much to raise is finding out how much you will need to get your company into the next state. Be it initial profitability or your next funding round; it is crucial to find out how much money you will need to get there.
So go and take a look at our following article on how to calculate your startup runway.
Make sure to raise enough to get to your next startup funding round without giving up too much of your company. A typical range is somewhere between 12 and 18 months.
There are significant differences in the amount raised by companies at this stage, but expect rounds to range from $50,000 to $2,000,000.
How should I value my company?
Let’s be real, there is no way to determine a price for your startup at this point. Without the availability of data points, you can’t project sales.
It is also difficult to value the skills of a team that hasn’t delivered yet on such a project. Finally, every investor will value the combination of skill and opportunity versus product and delivery differently.
Focus on raising the right amount of capital to get you into the next startup funding round and try to get this money on the best terms. 💰
Shop around, talk to several investors, and let the market set the valuation or price cap (in case of a convertible note) of your startup. Additionally, take a look at similar startups at your stage for a reference point in terms of valuation.
Realistically, you should expect to give away between 10% and 25% at this point.
This round is all about getting the necessary funding to build your product, to figure out your product-market fit, and to search for that scalable growth channel.
As an added bonus, a good investor can deliver great advice and share his network, while you are building your business as fast as possible.
Series A
Once you have found your product market fit, have developed a scalable and repeatable product, and have laid the foundation to create scale in your sales, it is time to super-fuel your growth.
This is where a Series A comes in.
In order to succeed in this startup funding round, it is all about convincing potential investors that your company can become a business with long term profit potential.
Expect investors to look at industry-relevant KPIs and metrics with great focus on your initial revenue and user growth to support their investment thesis.
The capital raised can then be used to truly optimise your product and business for scalability while growing your team to generate extraordinary demand. Following your Series A, investors expect to see exceptional growth.
Typical investors for this round are venture capital firms, with Accel Partners, Sequoia Capital, Benchmark and Greylock amongst the biggest names. But other profiles such as family offices, (super) angels and corporate ventures arms might also compete.
This is also the start of some political moves as you will probably need multiple investors on board.
One of those will take the lead, so make sure to select an investor that is truly bought in, as she will be an important supporter throughout the lifetime of your startup. Initial investors that do not participate in following startup funding rounds is never seen as a great sign.
Round sizes differ significantly per geography as market size matters. Expect EU rounds to be around $1m – $5m, US rounds to range from $2m to $15m, and Chinese rounds to go even beyond, for a 20% – 35% ownership stake.
Series B
The B stands for growth. 😂
After making your startup a growth machine with the Series A funding, it is now all about growing the company fast enough to deliver on the generated demand.
Investors need to understand how you can deliver at least 100% revenue growth yearly. They also need to understand where the opportunities are to further scale your business across markets and geographies.
The capital can then be used to grow your team across all key aspects (tech, sales, support, marketing), to enter additional markets, and to really scale up your business.
It is now even more important to find the right group of investors. They should help you to grow your business to be ready for the stock market and/or an attractive acquisition target.
This drags most companies towards VCs, as fueling aggressive growth is certainly in their field of expertise. But there is also a recent trend of bigger investors coming down to these rounds. So don’t be surprised to hear that mega players like Tencent, Softbank and Naspers, or even private equity and hedge funds, get involved for the most promising names.
At this point, investment sizes vary widely, but a range of $7m – $10m for a 20% – 35% stake is often cited as a normal round.
Series C or more
We’re entering the big leagues. 💪 From now on it is a race to the exit.
Having made it here is quite exceptional. You are probably running a startup valued at over $100m at this point, with several years of aggressive growth behind you.
There is a clear plan now to the exit.You have probably also had discussions with investors and advisors on what it takes to become a successful public company.
These startup funding rounds are all about optimising your company. You can do this by aggressively growing in key markets, gaining scale to establish yourself as the dominant player in your industry, and hiring mature leaders to bring your company to the next level.
As you have now gone from being a potential acquisition target to a potential acquirer yourself, you might also consider strategic buyouts or several talent acquisitions.
This is also an incredibly demanding funding stage. As rounds go from $50m to way beyond, you should expect grueling and long due diligence processes with a lot of parties involved.
At this point, there is a wide spectrum of investors looking at your deal. Beyond venture capital, expect large corporate investors, financial institutions, private equity, and hedge funds to take part in these rounds. Everyone is looking to get a piece before a potential exit.
With the abundance of capital interested in high growth startups, it is now becoming increasingly attractive to keep raising in private markets while delaying a potential IPO. However, as startup funding rounds keep being added, the investors participating are also increasingly similar to the big ticket names that you would expect to participate in an IPO. They will have the same expectations for corporate governance and due diligence.
IPO
Welcome to the grand finale? Kind of.
An initial public offering (IPO) is the process of making shares of a private company available to the public (on the stock market) in order to raise capital. In doing so, the company unlocks a vast amount of potential funding.
Why would I consider an IPO?
Access to more funding faster
Lately, there is a vast amount of funding available in the private market due to the recent success of VCs, the rise of mega funds like Softbank, and the entry of public investors like Fidelity. This is however still small compared to the available capital on the public market.
And it’s not just more funding, you can also access it faster. Being a successful public company allows you to raise additional funding virtually overnight through a rights issue.
Shares as a transparent currency
The company’s listing will provide you with a transparent valuation. This allows you to easily use shares as part of the compensation to the acquiree when doing acquisitions.
The transparency also allows you to easily compensate existing and future employees through the use of stock grants or options.
Liquidity to existing investors
Becoming a publicly traded company provides what is called a liquidity event to existing shareholders. Following the IPO and the subsequent lockup period, investors and employees are able to sell their shares as part of daily trading to monetize their stakes.
This allows investors to close out their positions and return cash to their Limited Partners (more on Limited Partners in this article about workings of VC funding).
Institutionalisation to enterprise standards
A public company is required to comply with additional regulation, increased reporting and improved corporate governance. This all leads to a new level of transparency, trustworthiness and in some sense stature.
Gaining this institutionalization will allow for easier access to debt markets and can be an asset when trying to close larger clients.
What holds me back?
Simple, being a public company is not always easy and it is expensive.
While in the private market you typically deal with professional investors who should correctly assess any risks involved, the public markets are different. In principle, this is the moment that anyone can buy your shares.
Therefore, there are a lot of protection mechanisms to protect such investors, which leads to regulation and requirements.
I guess we all remember the famous “funding secured” tweet from Elon Musk. He would have been in no trouble if he had done the same without being public. Once you are, however, a tweet like this becomes an official release of information. It should always be factual and fairly distributed among the public.
This all means that you should expect to add a layer of complexity to your business. You will need to invest in corporate governance, compliance to security laws, additional reporting, and investor relations.
The process of going public is also a monumental task. Processes can easily take six months up to more than a year. Given the importance and public nature of the event, the top management will be super involved.
Finally, being public introduces a new level of scrutiny. The quarterly or semi-annual reporting cycle can put tremendous pressure on your company to perform in the short term. You also lose the ability to choose your investors, so you better have a strong team to weather the storm of bad performance and unhappy shareholders.
What startup funding stage are you in? And what will it take you to get to the next round(s)? (If you’re at all looking to raise VC money.)
We hope this post made it all a little bit clearer! 😁
Let us know if you have any questions left; we’ll be happy to elaborate! Also, don’t forget to tune in next week for Part Five in our Startup Funding Masterclass: How to split startup equity!
Or check out this summary of the Startup Funding Masterclass.
When you’re serious about organizing your investment opportunities – try Salesflare.
Raising an investment round can be stressful, especially if you have no insight into what the other party is doing exactly.
Do your potential investors actually open your emails and when do they? Does it happen often or do they do this just once and then forget about you for a while? Do they click on the links towards the materials you’ve sent them, or not at all? Do they maybe check out your site?
To get some insight into this black box, we use our own software, Salesflare, to follow up investors.
We use it to keep track of whether they open our emails, click our links, visit our site. And we get notifications on our computer and phone when they do.
And if you’re dealing with multiple investors at the same time, it goes way beyond that:
– Salesflare offers you an overview of which investment deals is in which stage
– You can automatically keep track of all the emails you exchanged and meetings you had
– Took notes? Drop them in the timeline to keep them in one place
– Exchanged files with investors? Salesflare automatically keeps track of all those for you
– And Salesflare also helps you to follow up with investors at the right times, by creating automated reminders (in the form of suggested tasks)
If you’re tired of not knowing what investors are up to and/or could gain from better organizing your investor pipeline, give Salesflare a try. It’s set up in minutes and you’ll be on your way to professionally approaching investors and securing funding.
And, hey, following up investors is not the only thing you can organize in Salesflare. You can obviously also follow up customers, partnerships, resellers, … It’s all a sales process in some way!
By the way, if you’re in a pre-seed stage, you can always contact us on the chat on our homepage or by email to inquire about our early stage program. That way you can get started without breaking the bank! Ping us for the details on how to apply.
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I am an expert in startup funding and the various stages that companies go through to secure capital for their growth. My extensive knowledge is backed by hands-on experience and a deep understanding of the intricacies involved in fundraising.
The article you provided covers different startup funding stages, from pre-seed to IPO. Let's break down the key concepts mentioned in the article:
1. Pre-Seed Stage:
- Incorporation Structure: Deciding on the legal structure of the company.
- Licensing Requirements: Addressing any legal or regulatory requirements.
- Intellectual Property: Protecting and managing intellectual property assets.
- Option Pool: Allocating equity for future employees.
2. Seed Stage:
- Minimum Viable Product (MVP): Developing a functional version of the product.
- Core Team: Building a strong and capable team.
- Early Traction: Demonstrating initial market interest and user engagement.
- Customer Experiences: Providing positive user experiences to attract investors.
- Seed Funding: Raising capital from friends, family, angel investors, or venture capitalists.
3. Series A:
- Product-Market Fit: Proving that the product meets market demands.
- Initial Revenue and User Growth: Showing promising metrics to investors.
- Venture Capital Firms: Attracting funding from established venture capitalists.
- Lead Investor: Selecting a committed lead investor for ongoing support.
- Industry-Relevant KPIs: Key Performance Indicators become crucial for evaluation.
4. Series B:
- Aggressive Growth: Focusing on rapid company expansion.
- Revenue Growth: Demonstrating substantial revenue growth.
- Investor Profiles: Involvement of larger investors, including mega players and private equity.
- Strategic Moves: Preparing for potential acquisitions or market dominance.
5. Series C and Beyond:
- Race to the Exit: Preparing for potential exit strategies, acquisitions, or IPO.
- High Valuation: Running a startup valued over $100 million.
- Diverse Investor Pool: Involvement of various investors like corporate investors, financial institutions, private equity, and hedge funds.
6. IPO (Initial Public Offering):
- Access to Public Funding: Opening shares to the public for capital.
- Transparency and Valuation: Providing a transparent valuation and using shares as currency.
- Liquidity for Investors: Offering liquidity events for existing shareholders.
- Institutionalization: Adhering to increased regulations, reporting, and corporate governance.
Considerations:
- Timing: Building relations with investors early but pitching with sufficient evidence.
- Fundraising Amount: Calculating the right amount for the next funding round.
- Company Valuation: Determining a reasonable valuation based on market standards.
- Investor Relations: Building relationships with investors for long-term support.
In conclusion, navigating through these funding stages requires a strategic approach, a well-developed idea, market understanding, and the ability to showcase tangible progress at each step. As a seasoned expert, I encourage entrepreneurs to carefully plan and execute their fundraising journey to ensure sustainable growth and success.
