If you’re an entrepreneur who wants to start and grow a business, you need to understand the startup funding process. Startup funding is a way for entrepreneurs to get access to capital that can help them start their business, get a business concept up to scale and potentially lead to an Initial Public Offering (IPO).
Before you decide to raise startup capital for your new business, make sure you understand the fundamentals and know what to expect.
What Is Startup Funding?
Startup funding involves working with investors to raise funds that help a great business idea become a valuable business. In exchange for their startup funding money, investors get a share of ownership in the company, also known as an “equity stake.”
Many businesses are “bootstrapped,” meaning that the business owner raises capital for their business independently, “by their own bootstraps.”
Some small business owners raise capital by cashing out their home equity, running up debt on their credit cards or borrowing money from family and friends. Other new businesses get money from crowdfunding platforms by offering donors a free sample of the new product being developed.
The type of funding that is most sought-after is “venture capital.” This is funding that the entrepreneur gets from venture capital (VC) investors in exchange for a share of the business ownership.
With this kind of startup funding, the entrepreneur gets something they need (immediate cash to help the business grow) and the VC investors get something they need (a percentage of ownership of the hopefully fast-growing company).
VC investors are trying to invest in young companies that have the potential to become the next Facebook or Google. If your company grows to a significant level, both you and your investors can make more money together in a win-win scenario.
The Main Stages of Funding Your Startup
There are a few different stages or “rounds” of startup funding that you can take, depending on your company's goals and growth stage.
1. Research or Pre-Seed Funding
The pre-seed funding stage is when you conduct research and determine answers to all the most important questions about your startup's funding needs. You'll need to determine how much money you need and for what, as well as where you will source this capital from: bootstrapping and/or through venture capital investors. Important questions to ask yourself include:
Are you still at the “idea” stage, or do you have a clear path to revenues and profitability?
Can you raise money on your own through your personal and professional network, through crowdfunding, bootstrapping first, without investors?
Who will be on your executive team and who is best suited to each leadership role?
Do you understand the risks and costs of taking startup funding?
2. Seed Funding
This is the earliest funding round when the company is still at the initial “seed” stage of growth. Seed funding is typically used for market research, product development, hiring staff and other essential business operations to get the company’s product ready to launch.
Seed funding might come from angel investors (individual wealthy investors who like to invest in and provide mentoring for small, fast-growing companies), crowdfunding campaigns or the business owner's personal/professional networks. A round of seed funding might range from $10,000 to $2 million.
3. Series A
Many companies don’t need or want any additional startup funding beyond the seed round; they might already have enough capital to reach their goals and get their company up to scale.
Series A is the first round of venture capital (VC) funding. With the Series A round, the amounts of money invested start getting bigger, as do the goals of the company; this is for fast-growing startups with big ambitions.
As of 2020, the average Series A funding round was $12.5 million. Series A funding is typically used for further product development and refining the business model for scalable growth and profitability.
Venture capital firms participate in Series A, along with some “Super Angel” investors (angel investors that provide larger amounts of funding than typical angels) and accelerators (organizations that mentor and invest in tech startups).
4. Series B
This round of funding is about helping a successful company get bigger by expanding its reach — new product development, new markets, new talent acquisition, expanding to reach growing demand, etc. The average Series B round is $32 million of capital.
5. Series C
This is the biggest stage of venture capital funding for the most successful companies. The goals of Series C funding are often to help prepare the company for an IPO, expand into new markets or acquire other companies.
Find Funding That's Right for You
Starting a business (or growing an existing business) is exciting, but it can also be challenging, especially when determining how you will fund it. But all the startup funds don’t have to come from you. Startup loans from investors, peers or even banks can go a long way in turning your business into a reality and take the financial strain off your shoulders.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.