The five stages of VC funding
Updated 1st April 2019
Venture Capital funding is an attractive option for many growing start-ups, giving you access to the cash you need to grow, alongside valuable advice and expertise from seasoned investors. But, as you’ll soon learn when you enter this new and mysterious world of funding, all VCs weren’t created equal. In fact, the types of firms and size of deals you’ll be looking to do will change as your business evolves.
These distinct ‘stages’ of VC funding are designed to guide the growth of your business in a sustainable way, giving you the best prospect of succeeding, while balancing risk with a potential reward for investors. However, bear in mind that the individual stages aren’t totally set in stone. As we’ll explain below, there is some crossover between the different levels, while some businesses won’t go through all of them. Even so, this short guide should give you a good basis to start from:
- Seed stage. As you’d expect from the name, ‘seed’ funding is all about nurturing something small and helping it to grow. Entrepreneurs seeking seed funding have the germ of an idea and need a steady trickle of cash to get that idea off the ground. Seed funding rounds are therefore usually focused on research and development and will be much smaller than later funding rounds. Companies seeking seed funding frequently don’t have an MVP yet, or might have a very early stage prototype. So, a lot of the aim here is to persuade early-stage VC investors that your concept has legs and, most importantly, that you’re the person to make a success of it.
- Start-up stage (AKA Seed+ or pre-Series A). Assuming that everything goes well at the seed stage and you’ve used your initial tranche of funding wisely, you should now have enough market analysis and product development under your belt to start selling your product or service. However, making that jump requires a whole variety of new challenges such as marketing, hiring new staff, more product development, infrastructure to deliver at scale - and these things all cost money. Start-up stages are about getting your product market-ready and launching it, so you need to convince VC investors that your concept really is going to reap dividends in the long term. This means presenting a good, well-researched, strategic business plan, and focusing on those VCs that specialise in this stage of the startup journey.
- Second stage (AKA Series A). Confusingly, the ‘second stage’ is, actually, stage three. Even more confusingly, you may also sometimes hear it referred to it as Series A - and this is where things get serious. To get second stage funding, you should have proven that your team and your product can stand their ground against the competition. You should also have solid figures and analysis to back up your future growth plans, because second stage funding involves much larger numbers than the first two stages did. You’ll be wanting to expand into wider audiences, and that could require significant amounts of cash.
- Third stage (AKA Series B or C). By the third stage of VC funding you should be taking in a reasonable revenue, have a substantial user base and have a good rate of growth. The funding you get in the third stage will keep your basic operations running smoothly while you invest in things like product diversification, or maybe international expansion. Investors won’t necessarily be looking for your business to be making masses of profit at this point. However, they will want to see steady and consistent growth alongside good management practices and a solid understanding of both your existing market and the markets you want to expand into. At this stage, you’ll be looking to target much bigger VCs who have significant amounts of cash to invest and specialise in Series B and C levels of funding.
- IPO (or bridge) stage. This is where you hit the big time. If you’re seeking to go public by listing on the stock market, then it means a big windfall for you and your team, and big opportunities for your business. To reach this point, your product must have considerable momentum behind it, with a solid user-base, significant revenues and massive growth potential. The capital that this will inject into the business can be used for things like mergers and acquisitions to cement your leading position in the market. But on the flipside, you will suddenly be dealing with thousands of smaller shareholders and have an even greater level of pressure to perform financially and on a consistent basis. Having said that, exiting via IPO is the endgame for many VC investors (and entrepreneurs for that matter) who will at this point see returns on their investment by selling or nurturing their shares in your company.
Of course, every business is different, and you won’t necessarily progress through all of these stages. However, it’s useful to know what the ideal journey looks like, to give you a rough idea of the path that you’ll join when you first source funding from VCs, and who you should be talking to when.
Partnering with VCs puts you on a huge growth trajectory, but it’s important to be aware of the challenges. VCs can work wonders for your business, but always remember that their top concern is profit. So, be prepared to work hard and deal with plenty of pressure along the way.
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