Is putting blood, sweat, and tears into your product or service enough to throttle a startup to success? Ideally, it would be a winning combination, but, in reality, startups depend on funding to scale and position themselves for success in the market.
While there are different sources founders can turn to for funding, securing some type of funding from early on in the startup process is crucial to get off the ground. Continuing to raise additional funding as your startup scales will help fuel the growth, build an excellent team, and perfect your offering.
In each stage of startup funding, your funding options will vary as your valuation increases and the function of the funding evolves. Here’s what you need to know about the startup funding stages and how to find the right investor to fund your stage of business development:
The Stages of Startup Funding
The pre-seed funding stage is the earliest startup funding stage, often referred to as the “bootstrapping” phase or the friends and family funding round. At this point, you’re still refining your idea and exploring its feasibility in the market as you work to develop your minimum viable product (MVP).
Potential Investors of Pre-Seed Stage:
- Founder’s personal funds
- Friends and family (and friends of friends)
- Some angel investors (especially those comfortable with the high-risk, high-reward nature of such early investments)
Startup Valuation in Pre-Seed Stage: $10k-100k
Bootstrapping isn’t usually enough to get a business up and running. Nearly 29 percent of startups fail because they run out of money while funding it personally. After the pre-seed stage, most startups begin to look for outside investments during the seed stage to continue growing their business. Since the risk to invest is still very high at this point, investors typically require startups to provide them with equity in the company in exchange for their funding. With this injection of cash, startups can determine their final products and target market and begin launching or beta testing their first product to build traction. It’s also used to recruit skilled team members.
Potential Investors of Seed Stage:
- Friends and family
- Angel investors
- Micro VCs
Startup Valuation in Seed Stage: $3m-6m
The term “angel stage” is used to describe the umbrella of pre-seed and seed funding but also describes companies that are more accomplished and organized than most at the seed stage and are seeking additional angel investor funding before series rounds, which usually see more funding from venture capitalists vs. angels.
Potential Investors of Angel Stage:
- Angel investors
- Super-angels, investors with a high net worth who invest large amounts in early stages
- Angel groups, several angel investors who join forces to gain access to better deal flow, lower the risk of investing, and make more meaningful investments
Startup Valuation in Angel Stage: $7.5M
Once you reach Series A, B, and C funding, you’ve entered into the venture capital stages, where VCs will become your primary investors. VCs invest larger amounts, which become necessary as your startup scales and works its way toward IPO.
Series A Funding Stage
Series A funding is the first round of VC financing. At this point, you have a solidified product and a strong team in place. You should also have a working business model in action as you develop your product or service further and begin to scale with the blueprint you’ve created. During Series A funding, investors will expect you to provide them with preferred stock in your company.
Potential Investors of Series A Stage:
- Super angels
- Venture capitalists
- Accelerators, mentor-based organizations that provide guidance and capital as well as opportunities to connect with potential investors
Startup Valuation in Series A Stage: $10-30M
Series B Funding Stage
After a successful Series A round, most startups will require a Series B round to continue scaling the business and increasing market share. Now, with a successful product active in the market, you can respond to growing and changing consumer demands to outperform and outlive other competitors in the market. As your market share increases, you’ll also need to use the funds raised to keep building larger, high-quality teams to run the business.
Potential Investors of Series B Stage:
- Late-stage VCs
Startup Valuation in Series B Stage: $30-60M
Series C Funding Stage
Series B may be the last funding stage for some startups, but Series C is typically the final point of fundraising to continue expansion before IPO. Startups that raise Series C funds need the financing to expand into new markets, create new products, and perhaps acquire other underperforming startups in the same niche. This expansion stage helps get startups on track to go public or get acquired by a larger company.
Potential Investors of Series C Stage:
- Late-stage VCs
- Private equity firms
- Hedge funds
Startup Valuation in Series C Stage: $100-120M
Series D and Beyond
Series D and beyond is not always necessary, but it can be helpful for startups looking for a new expansion opportunity before IPO or additional funds to increase the company value before going public. Other companies may simply want to stay private for longer, selecting specific investors rather than opening things to the public.
A startup also might need Series D funding if they didn’t reach their Series C expectations, which would be referred to as a “down round.”
Potential Investors of Series D (and beyond) Stage:
- VC firms
- Large private equity firms
- Hedge funds
Startup Valuation in Series D (and beyond) Stage: $150-300M. Valuations vary widely at this point because so few startups reach this point. Valuation could be high if the company has done well, or low if they are in Series D because of a down round.
IPO (Initial Public Offering)
At the point of IPO, or Initial Public Offering, the startup offers the general public the opportunity to purchase corporate shares for the very first time. At this point, you should already have a growth-oriented team fleshed out as well as stable, impressive financial statements. Your corporate governance should be established and implemented into operations, and your company should be positively perceived in the market.
Valuation: At least $100M in revenue
How Entrepreneurs Can Get Funded at Each Stage
The way you find funding for your startup will vary slightly based on the stage you’re currently in. At the same time, what investors look for in entrepreneurs will also change depending on how far along you are in the business development process.
For pre-seed and seed stages, use your network to your advantage. If you need additional funding after bootstrapping, first ask your friends and family (and friends of friends, etc.). You can also take your search online, finding connections through directories like AngelList or LinkedIn. Use second and third LinkedIn connections to make an introduction. Networking at industry and local events can also be a great way to meet angel investors.
In VC stages, start by researching venture capital funds that have invested in companies similar to yours. You can find them online via personal websites or social media, find them in-person at events they may attend, or utilize a connection to make a warm introduction on your behalf. In certain cases where you may not have a referral or introduction, sending a cold email may be your best (or only) option.
Once you’ve found potential investors, you’ll need to know how to impress the investors enough to get funded. Craft a compelling pitch, get all of your documents in order, including sales projections, your business plan, and market research, and present everything in an organized, clear manner. If you pique their interest enough, they’ll offer a deal and negotiate terms.
Finding the Right Investor for Your Stage of Business Development
The current stage of your business will determine what kind of investors you should consider. For example, angels are typically best suited for early-stage companies in the pre-seed, seed, and angel stages since they’re more comfortable taking on a higher level of risk and can provide the smaller amounts needed to get a startup off the ground. Venture capitalists tend to be better suited for startups in series A, B, and C, as they invest higher amounts needed to scale an active business.
Beyond that distinction, finding an investor who has experience with other companies at the same stage, and perhaps within the same niche or industry, is always a strategic approach. This ensures they’re comfortable with the level of risk that comes with your stage and have the experience necessary to contribute to your success.
Always do individualized research on potential investors to learn more about them and their investing experience and make the right decision for your startup.
Which Investor Should You Select For Your Business?
The gradual and intentional scaling practice helps startups identify what their current needs are and which investors are most aligned with their stage to help them grow. For startups in their early stages looking for more than just cash flow that would benefit from the expertise of an experienced investor, angel investors provide just that.
Steve MacDonald is a seasoned angel investor who seeks to invest in bold, brave, and world-changing ideas. If you’re looking for the right angel investor to give your startup the edge and capital it needs, reach out to MacDonald Ventures.