From Pre Seed to IPO - Startup Funding Stages Explained

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From Pre Seed to IPO - Startup Funding Stages Explained

Raising funds is one of a company's most exciting and challenging tasks. Loans, investments, and funds are crucial to keep a company's doors open.

By: Shahid Aziz
date
02 September, 2022
time
8 min read

Table of Content

You have an idea. Not just an idea but a life-changing idea. You want to work on it and create something extraordinary from it. You are entitled to that. But what happens if you don’t have the dollars or euros or any money to support that idea?

 Will you simply give up?

Or

Will you try to find ways to get the money to turn your idea into a reality?

In the corporate world, trying to find money is compressed into one single word: ‘Funding!’

Now, this is where things take an exciting turn! 

Understanding the Fundamental Rules of Funding

As Paul Graham, the legendary founder of Y Combinator has said,

Don’t raise money unless you want it, and it wants you. It might seem fundraising is one of the defining qualities of a startup. Actually, it isn't. Rapid growth is what makes a company a startup.”

Let me paint a picture for you.

Your idea has turned into a reality, and your startup has taken its first step out in the open. You are new to the market, but you are proving your worth. Your product shows great potential and over time your company starts to grow at a steady pace. Word of mouth spreads, and you grow in demand. Your business has expanded its operations, and you have a growing customer base.

Before long, your company is ahead of its competitors, has a solid name in the market, and has decided to expand the office further and resources and publicly start offering company shares.

Sounds too good to be true, right? In a perfect world, this story would work perfectly and have a picturesque happy ending as well.  

In reality, successful startups have to go through a series of gruesome funding rounds to raise capital. Angel investors or other investors provide funding in exchange for equity or partial ownership of the said company.

The process of growing a business through outside investment is divided into funding rounds, namely Series A, Series B, etc.

You can even start with seed funding or angel investor funding to kick-start your business and move to other funding stages. Series A, B, and C are the deciding moments for your business. You could either continue bootstrapping and drain your accounts or work on an investor pitch that would blow people’s minds.

Startup Funding Stages

Firstly, you need to evaluate your startup’s standing and what would be the amount that you can raise from external sources. This is how startup funding stages proceed:

       Pre-Seed Funding: The bootstrapping stage

       Seed Funding: Product development stage

        Series A Funding: First round of VC

       Series B Funding: Second round of VC

       Series C Funding: Third round of VC

       Series D Funding: Special round of funding

       IPO: Stock market launch

We’ll go through all of them in detail, and by the end of this blog, you will know all there is to know about external funding and where to get them.

Pre-Seed Funding: The Bootstrapping Stage

Before a tree is grown, the seed needs to take place in the right fertilized soil. Even before that, you need to make sure that the seed is good enough for the plantation. This crucial phase of seed funding occurs at such an early stage that it is not even thought of as a real startup investment.

Pre-seed funding is the stage when startups are just kicking off their operations from the ground. Investors don’t invest in exchange for equity so early. Your chance of getting funding depends on your business idea, the nature of your business, and the initial costs of your business model development.

This is the bootstrapping stage, which means you are funding the company out of your own pockets. If you are a budding entrepreneur, you might also seek guidance from founders who have gone through this stage and had a similar experience as you.

You also need to sort out legalities pertaining to your startup. Any copyrights, partnership agreements, or any other legal issues best be sorted during this stage. Investors will take this into account when providing your company with funding.

No one wants to invest in a company that has exploding legal issues!

Who might be the potential investors of the pre-seed stage?

There are 3 most common pre-series investors:

       Startup owners

       Family/ Friends

       Micro VCs (Early-stage venture funds)

Valuation in pre-seed: $10,000 - $100,000

Pre-stage investors: Seedcamp, K9 ventures, first round

Seed Funding: Product Development Stage

Now you are at the stage where you can plant the seed!

The first mature funding stage is called Seed funding. Almost 38% of the startups fail because they run out of capital either during the bootstrapping phase or fail to raise further capital. 

A valid and appropriate business strategy will water your startup and allow its roots to take growth. Investing in a business like a ‘baby’ is always a risk. There is a considerable risk of failure or a hundred other things that could go wrong. The stakes are impossibly high at this point. So to secure seed funding, investors are candied with equity against their investment.

Seed investment enables a firm to cover product launch expenditures, gain early traction through marketing, undertake critical hiring, and do additional market research to create product-market fit.

Some startups only want seed funding to launch their startup in the market successfully. This stage involves the development of the product and a prototype that can be presented to future investors.

Who Might be the Potential Investors of the Seed Stage?

The common investors participating in seed funding are:

       Friends and Family

       Angel Investors

       Early-Stage Venture Funds (Micro VCs)

       Crowdfunding

Valuation in Seed Funding:

Startups eligible for seed funding have a business that is evaluated anywhere between $3 million to approximately $6 million.

So, the funding provided at this stage is anywhere between $50,000 to $3 million.

Seed stage funds readily available: 500 Startups, Y Combinator, AngelPad, Techstars, Speedinvest.

Series A Funding Stage

Before we take a detailed look at the mature funding stages. Let’s clear out what venture capital (VC) means.

According to Investopedia,

“Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions.”

Series A is the first round of venture capital financing. The startups must have developed the product, and at least the beta version would be out in the market. To enter the Series A stage, a consistent revenue flow with a customer base must exist.

You need to provide investors with a strategy, that shows long-term profits. The more practical and solid the plan, the more beneficial it will be for you. The plan should also emphasize monetization in the long run and not just how to increase the users of the product.

This is the best time to learn more about fundraising and how it works. Your social skills will come in handy. You need to start making early connections with VCs and angel investors.

“Following the 30-10-2 rule, you must identify investors who would want to invest in your startup. According to this rule, you must find 30 investors who are willing to invest in your business. 10 out of those 30 investors might show interest in your proposal, 2 of which will really pass on funds to you.”

You need to make sure that investors understand that you want them to have an early view of your plans and strategies and that you will start raising money in the next couple of months.

VCs will be looking into startups that have a solid plan or business strategy that will make money and allow investors the benefits of investing in your firm. Getting the first investor is hard but once you secure that anchor for your boat, additional investors will be swimming toward you.

This is a VC dominant stage, angel investors have much less pull as compared to the seed funding stage.

Who might be the potential investors for Series A?

       Accelerators

       Super Angel Investors

       Venture Capitalists

Company Valuation and Fundraising

You can raise approximately $2 million to $15 million during the Series A funding stage. Your company evaluates between $10 million to $30 million with a good business plan.

Series A Investors

IDG Capital, New Enterprise Associates, Sequoia Capital, Plug and Play, Google Ventures, and SOSV.

Less than 10% of seed-funded companies go on to raise Series A funding as well.

Series B Funding Stage

You are way past the development phase now. Now, it is all about taking your business to the next level and expanding its market reach.

Since you have scored seed and Series A funding that means you have an established and substantial user base. Once your company has created the demand, it's time to grow the company to meet the demand.

The company now needs to establish teams such as marketing, content, business development, talent acquisition, and customer success. Your company is substantially ready to compete in the market. Series B is quite familiar to Series A, you need an anchor investor to get more investors.

The main difference is the addition of a new crop of VCs who specialize in investing in well-established firms for them to further exceed expectations. Annual recurring revenue is the metric of choice for most investors in Series B.

Praveen Tipirneni, MD & CEO of Morphic Therapeutic Inc. suggests,

“The dilemma is that while your Series A investors were extremely important to you during that round, they may not be the investors you need going forward. If you are in a position where the going public is a real possibility, then you need the crossover investors who will be there for you today and when you go public,”

Who might be the potential investors for Series B?

      Venture Capitalists

      Late-stage VCs

Valuation and Fundraising

In 2021, the median pre-money valuation of Series B companies was $40 million. The average Series B funding is more than $24 million (up to $ 30 million), at a valuation between $30-$60 million.

Series B investors

Khosla Ventures, Kleiner Perkins Caufield & Byers, GV, StartX (Stanford-StartX Fund), and General Catalyst Partners

Series C Funding Stage

You have a steady growth trajectory if you’ve made it to Series C Funding. Now the funding that you need is to develop and build new products, expand to newer markets and even acquire underperforming startups.

You will find happy investors heading your way and ready to provide capital at a moment’s notice. They focus more on the company scaling as quickly as possible. Many hedge funds, private equity firms, etc., will want to put money in your company.

Congratulations, you have proven yourself a success. Now the gamble is higher than ever before. The money has reached the skyscraper and now it's your turn to focus on developing new products and ensure the profits are more than the investment.

Global Expansion is What We are Looking at in Series C Funding.

Who might be the Potential Investors for Series C?

      Late-stage VCs

      Private Equity Firms

      Hedge Funds

      Banks

Valuation and Fundraising

In 2021, the median pre-money valuation for Series C companies was around $68 million, although some companies going through Series C funding may have valuations much higher.

You can raise $52.5 million or higher depending on your company valuation.

Series C Investors

Accel, Sequoia Capital, Founders Fund, and Lightspeed Venture Partners. 

Series D Funding Stage

Not many find the need to push for Series D Funding. Companies that do continue with Series D funding tend to either do so because they are in search of a final push before an IPO or because they have not yet been able to achieve the goals, they set out to accomplish during Series C funding.

Who Might be the Potential Investors for Series D?

       Late-stage VCs

      Private Equity Firms

      Hedge Funds

      Banks

Valuation and Fundraising

You can raise approximately $100 million, and the company is valued between $150 million to $300 million.

Series D Investors

They are the same as Series C and include Accel, Sequoia Capital, Founders Fund, and Lightspeed Venture Partners. 

Initial Public Offering (IPO)

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. An IPO allows a company to raise capital from public investors.

This allows startups to either generate funds if needed or allow startup owners to exit some or all of the ownership by completely selling their shares to the general public.

The Set of Events During the IPO

      Formation of an external public offering team comprising underwriters, lawyers, certified public accountants, and SEC experts.

      Compilation of the startup’s information, including its financial performance as well as its expected future operations.

      An audit of the startup’s financial statements takes place, which generates an opinion about its public offering.

      The startup files its prospectus with the SEC and determines a specific date for going public.

Steps to an IPO

      Proposals

      Underwriter

      Team

      Documentation

      Marketing and Updates

      Board and Processes

      Shares Issued

      Post-IPO

At the End of the Day…..

If you feel like you have a solid understanding of the market and a qualifying business strategy then you need to start working on your pitch. To qualify for funding, ensure your idea and company are mature enough.

When you’ve secured enough funding and went for IPO, you might just retire after it or think about investing in other startups. You’ve surely earned the rest!

You have an idea and need a team to develop and build your product. InvoZone is here for you! Our team of dedicated developers will help you every step of the way. This product will be the cake that gets you the funding you want. Talk to our team today and finalize your business strategies.

You have an idea. Not just an idea but a life-changing idea. You want to work on it and create something extraordinary from it. You are entitled to that. But what happens if you don’t have the dollars or euros or any money to support that idea?

 Will you simply give up?

Or

Will you try to find ways to get the money to turn your idea into a reality?

In the corporate world, trying to find money is compressed into one single word: ‘Funding!’

Now, this is where things take an exciting turn! 

Understanding the Fundamental Rules of Funding

As Paul Graham, the legendary founder of Y Combinator has said,

Don’t raise money unless you want it, and it wants you. It might seem fundraising is one of the defining qualities of a startup. Actually, it isn't. Rapid growth is what makes a company a startup.”

Let me paint a picture for you.

Your idea has turned into a reality, and your startup has taken its first step out in the open. You are new to the market, but you are proving your worth. Your product shows great potential and over time your company starts to grow at a steady pace. Word of mouth spreads, and you grow in demand. Your business has expanded its operations, and you have a growing customer base.

Before long, your company is ahead of its competitors, has a solid name in the market, and has decided to expand the office further and resources and publicly start offering company shares.

Sounds too good to be true, right? In a perfect world, this story would work perfectly and have a picturesque happy ending as well.  

In reality, successful startups have to go through a series of gruesome funding rounds to raise capital. Angel investors or other investors provide funding in exchange for equity or partial ownership of the said company.

The process of growing a business through outside investment is divided into funding rounds, namely Series A, Series B, etc.

You can even start with seed funding or angel investor funding to kick-start your business and move to other funding stages. Series A, B, and C are the deciding moments for your business. You could either continue bootstrapping and drain your accounts or work on an investor pitch that would blow people’s minds.

Startup Funding Stages

Firstly, you need to evaluate your startup’s standing and what would be the amount that you can raise from external sources. This is how startup funding stages proceed:

       Pre-Seed Funding: The bootstrapping stage

       Seed Funding: Product development stage

        Series A Funding: First round of VC

       Series B Funding: Second round of VC

       Series C Funding: Third round of VC

       Series D Funding: Special round of funding

       IPO: Stock market launch

We’ll go through all of them in detail, and by the end of this blog, you will know all there is to know about external funding and where to get them.

Pre-Seed Funding: The Bootstrapping Stage

Before a tree is grown, the seed needs to take place in the right fertilized soil. Even before that, you need to make sure that the seed is good enough for the plantation. This crucial phase of seed funding occurs at such an early stage that it is not even thought of as a real startup investment.

Pre-seed funding is the stage when startups are just kicking off their operations from the ground. Investors don’t invest in exchange for equity so early. Your chance of getting funding depends on your business idea, the nature of your business, and the initial costs of your business model development.

This is the bootstrapping stage, which means you are funding the company out of your own pockets. If you are a budding entrepreneur, you might also seek guidance from founders who have gone through this stage and had a similar experience as you.

You also need to sort out legalities pertaining to your startup. Any copyrights, partnership agreements, or any other legal issues best be sorted during this stage. Investors will take this into account when providing your company with funding.

No one wants to invest in a company that has exploding legal issues!

Who might be the potential investors of the pre-seed stage?

There are 3 most common pre-series investors:

       Startup owners

       Family/ Friends

       Micro VCs (Early-stage venture funds)

Valuation in pre-seed: $10,000 - $100,000

Pre-stage investors: Seedcamp, K9 ventures, first round

Seed Funding: Product Development Stage

Now you are at the stage where you can plant the seed!

The first mature funding stage is called Seed funding. Almost 38% of the startups fail because they run out of capital either during the bootstrapping phase or fail to raise further capital. 

A valid and appropriate business strategy will water your startup and allow its roots to take growth. Investing in a business like a ‘baby’ is always a risk. There is a considerable risk of failure or a hundred other things that could go wrong. The stakes are impossibly high at this point. So to secure seed funding, investors are candied with equity against their investment.

Seed investment enables a firm to cover product launch expenditures, gain early traction through marketing, undertake critical hiring, and do additional market research to create product-market fit.

Some startups only want seed funding to launch their startup in the market successfully. This stage involves the development of the product and a prototype that can be presented to future investors.

Who Might be the Potential Investors of the Seed Stage?

The common investors participating in seed funding are:

       Friends and Family

       Angel Investors

       Early-Stage Venture Funds (Micro VCs)

       Crowdfunding

Valuation in Seed Funding:

Startups eligible for seed funding have a business that is evaluated anywhere between $3 million to approximately $6 million.

So, the funding provided at this stage is anywhere between $50,000 to $3 million.

Seed stage funds readily available: 500 Startups, Y Combinator, AngelPad, Techstars, Speedinvest.

Series A Funding Stage

Before we take a detailed look at the mature funding stages. Let’s clear out what venture capital (VC) means.

According to Investopedia,

“Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions.”

Series A is the first round of venture capital financing. The startups must have developed the product, and at least the beta version would be out in the market. To enter the Series A stage, a consistent revenue flow with a customer base must exist.

You need to provide investors with a strategy, that shows long-term profits. The more practical and solid the plan, the more beneficial it will be for you. The plan should also emphasize monetization in the long run and not just how to increase the users of the product.

This is the best time to learn more about fundraising and how it works. Your social skills will come in handy. You need to start making early connections with VCs and angel investors.

“Following the 30-10-2 rule, you must identify investors who would want to invest in your startup. According to this rule, you must find 30 investors who are willing to invest in your business. 10 out of those 30 investors might show interest in your proposal, 2 of which will really pass on funds to you.”

You need to make sure that investors understand that you want them to have an early view of your plans and strategies and that you will start raising money in the next couple of months.

VCs will be looking into startups that have a solid plan or business strategy that will make money and allow investors the benefits of investing in your firm. Getting the first investor is hard but once you secure that anchor for your boat, additional investors will be swimming toward you.

This is a VC dominant stage, angel investors have much less pull as compared to the seed funding stage.

Who might be the potential investors for Series A?

       Accelerators

       Super Angel Investors

       Venture Capitalists

Company Valuation and Fundraising

You can raise approximately $2 million to $15 million during the Series A funding stage. Your company evaluates between $10 million to $30 million with a good business plan.

Series A Investors

IDG Capital, New Enterprise Associates, Sequoia Capital, Plug and Play, Google Ventures, and SOSV.

Less than 10% of seed-funded companies go on to raise Series A funding as well.

Series B Funding Stage

You are way past the development phase now. Now, it is all about taking your business to the next level and expanding its market reach.

Since you have scored seed and Series A funding that means you have an established and substantial user base. Once your company has created the demand, it's time to grow the company to meet the demand.

The company now needs to establish teams such as marketing, content, business development, talent acquisition, and customer success. Your company is substantially ready to compete in the market. Series B is quite familiar to Series A, you need an anchor investor to get more investors.

The main difference is the addition of a new crop of VCs who specialize in investing in well-established firms for them to further exceed expectations. Annual recurring revenue is the metric of choice for most investors in Series B.

Praveen Tipirneni, MD & CEO of Morphic Therapeutic Inc. suggests,

“The dilemma is that while your Series A investors were extremely important to you during that round, they may not be the investors you need going forward. If you are in a position where the going public is a real possibility, then you need the crossover investors who will be there for you today and when you go public,”

Who might be the potential investors for Series B?

      Venture Capitalists

      Late-stage VCs

Valuation and Fundraising

In 2021, the median pre-money valuation of Series B companies was $40 million. The average Series B funding is more than $24 million (up to $ 30 million), at a valuation between $30-$60 million.

Series B investors

Khosla Ventures, Kleiner Perkins Caufield & Byers, GV, StartX (Stanford-StartX Fund), and General Catalyst Partners

Series C Funding Stage

You have a steady growth trajectory if you’ve made it to Series C Funding. Now the funding that you need is to develop and build new products, expand to newer markets and even acquire underperforming startups.

You will find happy investors heading your way and ready to provide capital at a moment’s notice. They focus more on the company scaling as quickly as possible. Many hedge funds, private equity firms, etc., will want to put money in your company.

Congratulations, you have proven yourself a success. Now the gamble is higher than ever before. The money has reached the skyscraper and now it's your turn to focus on developing new products and ensure the profits are more than the investment.

Global Expansion is What We are Looking at in Series C Funding.

Who might be the Potential Investors for Series C?

      Late-stage VCs

      Private Equity Firms

      Hedge Funds

      Banks

Valuation and Fundraising

In 2021, the median pre-money valuation for Series C companies was around $68 million, although some companies going through Series C funding may have valuations much higher.

You can raise $52.5 million or higher depending on your company valuation.

Series C Investors

Accel, Sequoia Capital, Founders Fund, and Lightspeed Venture Partners. 

Series D Funding Stage

Not many find the need to push for Series D Funding. Companies that do continue with Series D funding tend to either do so because they are in search of a final push before an IPO or because they have not yet been able to achieve the goals, they set out to accomplish during Series C funding.

Who Might be the Potential Investors for Series D?

       Late-stage VCs

      Private Equity Firms

      Hedge Funds

      Banks

Valuation and Fundraising

You can raise approximately $100 million, and the company is valued between $150 million to $300 million.

Series D Investors

They are the same as Series C and include Accel, Sequoia Capital, Founders Fund, and Lightspeed Venture Partners. 

Initial Public Offering (IPO)

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. An IPO allows a company to raise capital from public investors.

This allows startups to either generate funds if needed or allow startup owners to exit some or all of the ownership by completely selling their shares to the general public.

The Set of Events During the IPO

      Formation of an external public offering team comprising underwriters, lawyers, certified public accountants, and SEC experts.

      Compilation of the startup’s information, including its financial performance as well as its expected future operations.

      An audit of the startup’s financial statements takes place, which generates an opinion about its public offering.

      The startup files its prospectus with the SEC and determines a specific date for going public.

Steps to an IPO

      Proposals

      Underwriter

      Team

      Documentation

      Marketing and Updates

      Board and Processes

      Shares Issued

      Post-IPO

At the End of the Day…..

If you feel like you have a solid understanding of the market and a qualifying business strategy then you need to start working on your pitch. To qualify for funding, ensure your idea and company are mature enough.

When you’ve secured enough funding and went for IPO, you might just retire after it or think about investing in other startups. You’ve surely earned the rest!

You have an idea and need a team to develop and build your product. InvoZone is here for you! Our team of dedicated developers will help you every step of the way. This product will be the cake that gets you the funding you want. Talk to our team today and finalize your business strategies.

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