Every entrepreneur has the dream of seeing their start-up expand into a massive business, increasing their market reach, launching new products, and watching the chart of growth go upward. But the growth of any start-up is not smooth, but quite granular.
Granular growth means that your start-up’s growth journey would not be a continuous or smooth line on the graph, but a series of steps, each representing the different stages of a start-up’s life.
Following is everything you need to know about the stages of funding a startup:
Bootstrapping – The beginning
Every startup starts small. If you’re an entrepreneur, you must have heard of the term “bootstrapping” a lot. It gets thrown around every now and then when it comes to entrepreneurial conversation. But did you know that bootstrapping is the first and most basic stage of startup funding?
Bootstrapping is when the founder or the founders use their own personal wealth to fund the startup and keep it afloat. Businesses have a lot of expenses, and it is rare for any business to become profitable in the beginning.
This means that a startup loses a lot of money. So the revenue generated from the business will not be enough to keep it operational. It is often the most difficult stage of any startup because the business runs at a loss, there’s not enough money to put into the business, and all the risk is borne by the founders.
But there are some positive aspects of bootstrapping as well. While small in scale and slow in growth, bootstrapped startups are completely owned by the founders and they have all the controls over the company’s decision. The founders completely own the startup, giving them a lot of creative freedom, something that is often exchanged for financial freedom in the later stages of funding.
Seed Funding – The Bud of Growth
The second stage of a startup is often called “Seed Funding.” The reason why it’s called “seed” is because bootstrapped startups are not large enough to properly do business. Seed funding provides enough capital for the company to start doing market research, concept and prototype development, and some amount of marketing and promotion.
Seed funding is very crucial for any Startup because the financial aid should be used in the most efficient way possible. The goal here is to maximize the benefit of each penny. The use of the seed fund varies from company to company. Some startups might use it to develop a prototype further, while some might use it all on marketing and promotion.
Clearly, getting a financial boost in your Startup is a positive thing. With this investment, startups can hire more people, do proper research, and pace up their growth. But there is a negative side to it as well.
Seed funds are usually invested by angel investors, venture capitalists, and even friends and family. But these funds are not charity. Ownership gets diluted, giving you lesser ownership, and sometimes less control over the company as well.
Series A Funding
Series A funding is the third stage of startup funding, and this is the stage when things get serious. Startups that reach the third stage start getting recognized as proper businesses. Series A funding is often much larger than seed funding.
The main purpose of this funding is scaling up. Your startup, after sustaining the initial stages and developing the business, needs to grow more, operate in more areas or cities, and start hiring people. All of these require a lot of funds that come from Series A.
As with all the other fundings, this one also comes at a cost. Series A funding introduces new investors to your startup, and in most cases, venture capital firms as well. This means that there is a further dilution of the company, but more than that, you also lose a lot of control over the company’s direction. Often the investors for startups in India give a term sheet which includes what they want the startup to do. While it is true that you will lose a lot of control over your company, the growth startups get with Series A funding is substantial.
Series B Funding
Series B funding is a critical juncture in the growth trajectory of a startup, marking a significant leap from its initial stages. At this point, startups have successfully navigated the uncertainties of early development and proven the viability of their business model.
The primary objective of Series B funding is to take the company to the next level by providing substantial capital infusion. Typically led by venture capital firms, Series B rounds attract investors seeking to capitalize on the proven potential and scalability of the startup. The injected funds are strategically utilized to scale operations, intensify marketing efforts, and expand the customer base. Companies often use Series B funding to hire key talent, invest in technology and infrastructure, and solidify their market position.
It is a stage where the startup’s leadership is expected to demonstrate not only sustained growth but also a clear path to profitability. Successful Series B funding not only fuels expansion but also validates the startup’s market relevance and attractiveness to investors. While the process involves the dilution of ownership as new investors join the ranks, the trade-off is access to the expertise and networks of seasoned venture capitalists, providing valuable guidance and mentorship.
As Series B funding sets the stage for the subsequent stages of financing and, potentially, an eventual IPO, it represents a pivotal moment in a startup’s journey toward becoming a mature and sustainable business entity.
Series C Funding and Beyond
While not necessary, many companies may go for further rounds of funding to raise more money. It totally depends on the founders and the board members if they want to get more funding. More funding means faster expansion, but it also means further dilution of ownership as well.
There can be a Series D, Series E, so on and so forth investment rounds as well. But usually after Series C, or even Series B in many cases, companies go for the final stage of investment; IPO.
Initial Public Offering – The Final Stage of Funding
When a startup reaches the final stage of funding, also known as Initial Public Offering, the startup is considered a full-fledged company. An Initial Public Offering (IPO) is a transformative event in the life cycle of a company, marking its transition from private to public ownership.
At this stage, a company offers its shares to the public for the first time, allowing individual and institutional investors to become shareholders.. Going public through an IPO provides the company with access to a broader pool of capital, enabling significant fundraising for various purposes, such as expansion, research and development, debt repayment, and acquisitions.
The IPO also offers early investors and founders an opportunity to monetize their holdings, providing liquidity and realizing the value created during the private phase. However, the transition to a publicly traded company brings increased regulatory scrutiny and reporting obligations, requiring adherence to strict financial disclosure and governance standards.
Ending Note
That was all about the stages of startup funding, with everything important about each step. Every startup needs investment in some form; some become successful with bootstrap investment while others fail even after an IPO. What matters is how well the investment is being used.