Funding plays a crucial part in every startup's journey. It enables them to translate their ideas/concepts into products/services and eventually transform them into successful businesses. However, with a variety of funding options available to startups, the founders can sometimes feel overwhelmed and perplexed about the funding stage of their startup.
Thus, in this article, we'll cover various stages of funding i.e. from Pre-seed to IPO, highlighting differing characteristics, requirements, and what entrepreneurs can anticipate at each stage to succeed.
Startup stages are typically used to show roughly how much capital has been raised and where they are in the startup lifecycle. Each of these is depicted below.
PS: The amount raised at each round can be entirely subjective. A startup may call a seed round $500K, whereas another may call it a $2M seed round.
Pre-seed funding is the first or earliest stage of funding, where typically founders tap into their own savings (to avoid dilution), or their friends and family, and angel investors to raise initial capital to validate its idea and create a minimum viable product (MVP).
Pre-seed funding usually ranges from $500K - $1Mn and is used to fund market research, product development, and early marketing initiatives.
Seed funding is the stage where startups have validated the idea using proof of concept (POC), developed an MVP, and are looking to raise capital to develop their product and quickly generate traction to gain a foothold in the market.
Seed funding can come from incubators and accelerators, angel investors, crowdfunding platforms, or early-stage venture capital firms. At this stage, startups can anticipate raising between $500K and $2Mn. Seed funding enables the founders to conduct market research, onboard mentors/advisors, and build a founding team.
Pre-Series A is typically defined as a mid-round between Seed and Series A. It is used to finance the further development of the product/service and to help the startup achieve key milestones as it prepares to scale or raise a Series A round.
Series A Funding
Series A funding is a stage where startups have a full-blown product/service available to their customers, have early traction, and are now looking to scale their operations. The startups are expected to have a proven business model, achieved Product/Market Fit, a solid team, repeatable process for scale, and a clear path to profitability.
Series A typically involves raising substantial capital from venture capital (VC) firms and Super Angels (who prefer to co-invest with the lead VCs), with amounts ranging from $2Mn to $15Mn. VCs take a good amount of equity in exchange for their funds and actively participate in the mentorship, management, and growth of the startup.
Early Growth (Pre-seed to Series A)
In the early stages of a startup, the product, team, and market are commonly looked at the most This is because early-stage startups often have not had the chance to develop their product and achieve a strong amount of traction.
A bridge round is a type of funding that is used to extend the runway of a startup until it can raise the next round of venture capital funding. It is usually a smaller round than a normal one, and it is often structured as a convertible note or a SAFE.
Bridge financings are essentially in-between financings, and do not fall into the typically defined financings of Seed, Series A, Series B, etc. The goals of a bridge are based on the different needs of the companies:
Extending runway to achieve Product/Market Fit reach, or until market conditions improve (to raise funding.)
Hit certain KPIs and financial milestones (ARR, Revenue, etc.)
Use capital to move to profitability, or solve (temporary) financial problems.
Use capital to hire the necessary resources to expand an existing business or capture new business opportunity
Using small bridge rounds, companies set out to achieve set milestones with a small dilution (5-10%) hit as opposed to the large dilution (20-33%) usually seen for many priced financings.
Series B Funding
Series B funding is the stage where startups have achieved considerable or rapid growth and are now looking to develop new products/services, and/or expand into new markets. This stage typically involves raising even more substantial capital from venture capital firms and other institutional investors (family offices, private equity firms). At this stage, investors expect startups to demonstrate a clear path to profitability, and continued, long-term sustainable yet exponential growth. Series B funding can range from $15Mn to $50Mn.
Series C Funding
Series C funding is the stage where startups have achieved a significant level of scale and are looking to further expand to different geographies or buy out other startups. Startups at this stage are expected to have a proven business model, sustainable growth, and a clear path to profitability. This stage typically involves raising even more substantial capital from venture capital firms and other institutional investors. Series C funding can range from $50Mn to $200Mn.
Mid Growth (Series B-C)
As a startup matures and has its product/service fully developed, more and more emphasis is placed on achieving rapid growth in the form of new sales, customers, product enhancements, new geography, etc.
Series D Funding and Beyond
Series D and beyond funding is the stage where startups have already raised significant capital and achieved considerable success. During these stages, startups are looking to raise a significant amount of capital to accelerate their growth, expand/penetrate into new markets, and even make strategic acquisitions. Series D funding often comes from institutional investors like private equity firms or hedge funds, and the funding amount can range from $200Mn to $500Mn or even more.
Late Stage (Series D-F)
At this stage, startups will often have achieved massive growth It’s here where new revenue streams, new markets, or acquisitions are focused on. There is no limit to how many stages a startup may experience (Series F or beyond), the most important piece here is to raise additional funding from the prior round, at a much higher valuation.
Initial Public Offering (IPO)
A startup goes through an Initial Public Offering (IPO) to become a publicly traded firm. For many startups, an IPO is their most preferred outcome. When a startup goes public, its shares will be listed on a public exchange where it may be traded freely by retail investors, oftentimes at a much higher price per share than many / all of the previous rounds. The amount raised in an IPO can vary widely, depending on the size and success of the company. Note that an IPO does not always equate to a favorable outcome for each stakeholder. Many things can change when a startup IPOs.
Many times, a successful startup will choose to sell to another company for a large return (hopefully). Buyers can be large publicly traded companies, mid-size private companies, private equity ... the possibilities are endless.
In conclusion, the different stages of funding represent different milestones in a startup's journey, each with its own unique challenges and opportunities. Each stage requires a different approach, and entrepreneurs must understand the requirements and expectations of each stage to maximize their chances of success.
Ultimately, the most successful startups will be those that can demonstrate sustainable long-term growth, a proven business model, and a clear path to scalability and profitability.