Blog

5 startup funding stages you should know about

Funding is one of the most important and hard-to-find resources needed on your way to building your startup. Now, how well-prepared do you consider yourself to deal with this part of your venture? Are you aware of the startup funding stages or funding rounds you and your team are going to be ‘fighting for’ in the near or the distant future?

5 startup funding stages you should know about

To help you with that, we have prepared a compilation of useful information, related to each one of the funding stages that lay ahead of you. Among other things, we’re going to focus on:

  • the prerequisites or entering criteria
  • any limitations involved and 
  • available resources for each stage, along with 
  • other worth-to-know parameters

We hope you’ll find it useful.  

So, if you’re presently building a startup company — or aiming to build one in the future — here’s how the funding story goes:

Starting with “a little help from your friends”

It usually starts with your close-knit circle: family and friends. They’re ones to believe in you and invest in your dream first; and thus, help you get started with your startup company. And, it’s your relationship with them, together with your persuasion skills that will help you win that initial “funding round”. Your persuasion skills will probably help you get some extra money from your broader network — the fools as they are (clandestinely and inappropriately) called, by some. But, truth be told, these “fools” are, in fact, some of your first and best supporters. Don’t forget that. 

All in all, by joining forces with your 3Fs (family, friends and fools), you’ll manage to gather the first sum of money that will help you get off the ground. That’s when you’ll actually be able to say that you do have a startup in-the-making. 

And that was your “pre-seed” startup funding stage. Now, it’s time to start focusing on the more substantial startup funding stages — or, at least, the ones that will require you to lean on resources beyond your personal network.

On to the real fundraising game

This is the part of the game where you’ll be forced to pop your own bubble and get out of your comfort zone to try and get the capital that is required for your next steps. It will probably come the hard way. This means that, contrary to family and friends — that were, perhaps, happy or just eager to invest in your dream — investors will need more than just a good idea to get on board with it. 

Be it an angel investor, a VC or any other type of investor, they’ll require that you provide a sound, potentially viable business plan for your venture. That is, so they can rest easy knowing that you’re demonstrating the potential to build a startup that will grow into a scale-up. The chances for you to face difficulties in your effort to win them over, are high. But, keep in mind that turndowns and disappointment will, at least, offer you valuable insights to use in the future. More on that later. 

Startup funding stages 101  

So, what are the 5 startup funding stages your company will (hopefully) tread throughout your entrepreneurial journey?  Let’s have a look at how Crunchbase, the leading platform in offering startup information, groups the fundraising stages. Startup funding rounds are divided in three main categories, according to CrunchBase:

  1. Angel-and-Seed stage that includes pre-seed, seed and angel rounds.  
  2. Early stage with Series A and Series B funding rounds.
  3. Late stage with Series C, Series D and sequence of Series X that follow, on the previous pattern.

Apart from the categories above, Crunchbase also uses Technology Growth to group private equity rounds raised by a company that has previously raised a venture round.  But here, we’ll only focus on the three major funding stages above — as this categorization is widely approved — and we’ll examine the details of all the parts included.

In particular, we’re going to present each funding round in a compact format; one that will help you gain a clear understanding of the funding chessboard. We’ll give you a short description, along with useful details, such as: 

  • the prerequisites to “enter” that stage
  • estimation of capital you’ll probably get
  • available resources for each one, along with 
  • risks and important details you need to have in mind.

An overview of the 5 major startup funding stages 

Before we delve into the details for each of the startup funding stages, allow me to note that we’re going to focus more on the pre-seed funding stage, as discussed earlier.

1. Pre-seed

Pre-seed capital helps you establish the base of your startup, pay initial costs, leave your current job and, of course, set the foundation for the next funding rounds that will follow. It’s not typically considered to be an actual round of funding. Especially when the funding resources are our family and friends, as previously explained. Also, keep in mind that pre-seed capital, even coming from 3Fs, is not always within arm’s reach. And that means that, if that type of funding resource is not available, then you’ll inevitably be forced to look for investors, right from the beginning. 

Prerequisites: product/business idea 
Project in progress: finalize PoC or build a Pre-MVP version
Resources: 3Fs, angel investors 
Expected fund: (undefined)

2. Seed capital 

It’s the very first money that many startups will raise; and it’s crucial, as it helps buy some time before they become cash flow positive. In particular, the amount raised will be used to:

  • set the foundation of the business you’re aiming to build
  • help you bring in your first hires 
  • focus on product development
  • get the essential equipment and 
  • start your marketing efforts

You may find more detailed information on how you can get seed capital here, and learn more about the prerequisites that will get you there here.

Prerequisites: PoC or Pre-MVP
Project in progress: Market research and product development
Resources: Angel investors, incubators, early-stage-oriented venture capital firms
Expected fund: Typically, it’s between $500,000 and $2 million, but it can be less. “The truth is that the seed funding rounds vary significantly in terms of the amount of capital they generate for a new company”, as noted by Investopedia. As previously explained, location and industry affect the valuation of a startup; and the amount of money it can raise, as well.
Risks: Some startups may run out of runway. That means they will not get timely traction and, consequently, will not make it to the next stage. 

3. Series A

Startups that have already shaped a strong business strategy will typically be able to reach this startup funding stage. The strategy is justified and translated into meaningful KPIs. Their progress, so far, will help attract new investors’ attention to further fuel their venture with capital. And that’s more likely to happen when investors that have already invested in this startup company, intend to re-invest in a follow-up investment. Another striking difference here is that the amount of capital invested gradually increases, in comparison with previous stages; and the fact that investors now tend to become more active in their involvement.  

Prerequisites:

  • Gaining significant traction — of any type — that satisfies meaningful KPIs. Traction could be translated into users (subscriptions/registrations), website traffic, revenues or other meaningful metrics.
  • Having a clear business plan on how you’ll get further revenue growth, justifying your growth plan with a detailed plan on how to use the money you’re aiming to get.

Project in progress: Net revenue growth, with respective KPIs to evaluate
Resources: Venture capital firms and angel investors
Expected fund: $2 million – $15 million
Risks: There is a special name for the phenomenon of “so-far successful startups” failing at this point in time; that is called a “Series A crunch”. The failure may stem from the fact that “they fail to develop interest among investors”, as noted here. But, the truth is, there are contradictory perspectives on this aspect. You may find more information here.

4. Series B 

Well-established startups, that have already proven their business value to investors, are now ready to take success to the next level. Startups at this stage focus on talent acquisition, restructuring their departments and/or adding new specialized ones. All these strategic decisions will help them grow their company further, at a larger scale. And that will happen mainly by expanding their reach to target markets. 

Prerequisites: reached product market fit
Project in progress: scale
Resources: VC firms (usually the same investors from the previous funding round)
Expected fund: $7 million – $10 million

5. Series C

Usually, this is the last startup funding round a company raises; but there may be cases where startups proceed to raise additional rounds, such as Series D, Series E and so on. This stage is also considered to be one step away from a merger or acquisition, or an IPO.

Prerequisites: The company has already scaled. 
Project in progress: Developing new products or even acquiring other businesses/services.
Resources: Late-stage VCs
Expected fund: $26 million on average 

All in all, these were the most important startup funding stages you should be aware of. And, as you’ve probably noticed, getting from one stage to another means your startup meets some fundamental criteria. These criteria differ from stage to stage, depending on the amount of capital you’re asking for; and the profile of each investor. If they’re not satisfied, your startup will not manage to get that amount from that specific investor. But, is this (or these) rejection(s) of any benefit at all, or is it just waste? Well, that’s exactly what we’re focusing on, before we wrap this up.

Learnings from startup funding stages or How to make the most out of your fundraising effort

Your fundraising journey will be a daunting endeavor. Even if your startup has a brilliant idea to implement or one that is already in the works, chances are that investors will turn it down, most of the time. And that’s not a pessimistic point of view, but a realistic one. Even if your proposal is based on innovative technology or a product that will change people’s lives — or promises to do so — you’ll still have to stand out from a bunch of other proposals they have their hands on. 

Investors typically receive so many different pitches, focused on ‘brilliant ideas”. And they all crave financial back up. As expected, not all these pitches bear fruit. Be it because an idea is not that brilliant or because it offers no value to customers — or the market is just saturated — most pitches will be turned down. And that is more probable to happen in the early stages of a venture. 

But, there’s more…

These are not the only reasons for failing to get to the startup funding stage you’re aiming to get. Lacking experience and not being fully prepared are two good reasons to miss a funding opportunity. Both of them are true at all funding stages; and, because your startup is gradually maturing, gaining more and more experience in different business aspects, such as how to:

  • conduct market research
  • organize its departmental structure
  • approach new markets and 
  • meet all the prerequisites we briefly mentioned above

And that’s where lies the opportunity to learn and grow. A turn-down from a VC or angel investor, though disheartening, it will also present a great opportunity for you to see your startup from a different perspective. An opportunity to focus on reorganizing and polishing processes; restructuring your product roadmap or even making micro-pivots in the ways you approach different business aspects.    

Summing up

No matter which startup funding stage you’re aiming to reach this particular period, it’s always useful to have a concise overview of the major fundraising rounds that lay ahead of you. Each of them will (hopefully) provide you with different types and amounts of capital required for your startup’s growth. But, at the same time, they entail different preconditions, such as the entering criteria and investors’ involvement. In any case, fundraising efforts, at any of the startup funding stages we described above, will present great opportunities to reorganize your product, your strategy and your business, as a whole.

5 startup funding stages you should know about was last modified: December 3rd, 2020 by Konstantina Ferentinou

Konstantina Ferentinou Konstantina Ferentinou

The Starttech Ventures Content Marketing Writer. Studied Computer Engineering and Informatics at the University of Patras. She has working experience in technical writing, sales and support related roles. She now focuses on content creation. Channeling her creativity into writing, she hones her ability to communicate the right message through various content types.

Contact Starttech