Startup funding – what happens when?
In the early days of starting a business, you're bound to hear various investment terms bandied about and wonder how it all works. From seed funding to series A, B and C, it can sound a bit like a conveyer belt that you jump on as a founder, before being automatically shunted along to the different stages.
Well, it is a little bit like that. But in real life, everybody's conveyer belt is slightly different, depending on their individual business and cash requirements. It's important to know how each stage works as early as possible, so you can decide when and how your business should source the funds it needs to keep moving forward.
To give you an idea, here's a typical timeline of the investment stages, when they tend to happen and what they're used for:
Family and friends
Bootstrapping with your savings, or working part-time on your idea, is only sustainable for so long. You may have an early-stage prototype to work with, or a decent business plan but, with little to show investors, it's too early to go through a more formal funding round. That's where your friends and family come in! Research shows that around a third of start-ups do this and it's a great way to tide you over for a few months while you continue working on your brilliant idea.
The money from your friends and family probably won't last long, so it's important to move quickly to build a decent prototype or MVP (Minimum Viable Product) and start courting seed investors as soon as possible. During your seed round, you're going to primarily be speaking to angel investors – affluent individuals who provide capital for start-ups, in exchange for ownership equity. With your business still in an embryonic state, their money will be invaluable for taking it to the next stage, which may mean bringing your product to market, building your team, or investing in design, branding and marketing.
This tends to happen once your product or service is pretty clearly defined, you've launched to market and have built up some solid traction with your customer base. In the series rounds, you're effectively talking to venture capitalists, who invest in early-stage, emerging growth companies on behalf of clients. This funding round is usually required to optimise your product and user base, perhaps monetising your service, if you haven't already done so. You've shown your idea works and there's a market for it, now it's time to perfect it.
By this stage, you have a well-established business. You've got a strong team behind you, your product is well-managed, your
marketing is doing its magic and your customers are buying your product or service. Series B is all about building. It's now time to scale your venture, through taking on staff, investing in marketing and advertising, perhaps expanding into new markets. You might even be considering acquisition at this stage, to bring in new technology, or remove the threat of a competitor.
There is no limit on the number of series rounds a business can go through, and series C is effectively a continuation of A and B, enabling you to invest in the areas that need an injection of cash to take the business to the next level. It can also be used for what is known as 'bridge funding', to help the business prepare for an IPO (Initial Public Offering) or sale. By this point, you'll be raising hundreds of millions of pounds for your company.
IPO or sale
The final step! Many entrepreneurs go for years before reaching this point, and there's evidence that businesses are staying private for longer, if Snapchat and Uber are anything to go by. But most entrepreneurs and their investors want to cash out eventually. An IPO gives you a way of raising cash quickly and giving your investors greater liquidity, so their money is no longer tied up in the business. The other option is to sell your company to a competitor, or perhaps a private equity firm, to take it to the next stage of its journey, leaving you to move onto pastures new.
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