#18 - Stages of VC Funding
From Startup to Stock Market, Differentiating Between the Stages of VC Funding
It all began with an idea. It’s new, innovative, a product or service that’s never been done before. You’ve picked a name, designed a logo, created a prototype and have even identified your potential market… What’s next? In this StartOP article we explore everything you need to know to navigate the complex world of venture capital funding.
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Early Stage Funding
Beginning to believe your idea has potential, you tucked away your shyness and turned to the people around you for financial support. Funding at this stage is called pre-seed funding and is commonly raised through personal connections, angel investors (professionals who invest their own money in promising companies), crowdsourcing, and, in some cases, VC firms that specialize in early stage funding. Some ventures will skip this fundraising round entirely and choose to “bootstrap” their venture (using the founder’s own money to cover the startup’s initial expenses).
About a year after your pre-seed raise, you’re hopefully beginning to refine your idea and identify a likely product market fit. You are also looking to expand your team and hire a few employees to help grow the business. The seed raise is often the first substantial round of funding raised by startups and often ranges from $1-3 million dollars. During this round you begin turning to more institutional investors, such as venture capitalists, who can be a key factor in supporting your Series A raise.
Growth Stage Funding
With an initial stream of customers, people are really starting to believe in you. However, the money raised from Pre-Seed and Seed only got you so far. In the hopes of further expanding your team and growing your business, you begin pitching Series A focused VC firms about the value and potential of your startup to garner their support.
Venture capital firms regularly raise money from limited partners before investing this pool of money over a period of 3 to 5 years in companies like yours (check out our last article to learn about the structure of VC firms). VC firms often specialize in a certain industry funding stage so make sure to reach out to investors who focus on your industry!
Series B and C
Your business is rapidly expanding and you need even more funding to keep up with the growth. You’ve overcome the initial challenges of starting a company but still have a long way to go in achieving mass market appeal. The capital raising process in series B and C begin to more heavily emphasize financial projections compared to earlier rounds.
Late Stage Funding
Series D, E, F
You are continuing to grow and almost all the puzzle pieces are meshing together but you require even more capital in each proceeding stage. You may have earned your first profit around this time, but need more capital for growth before going public through an initial public offering (IPO) or a special purpose acquisition company (SPAC). You would begin pursuing investors at later stage venture capital firms, large private equity firms, or even hedge funds designed around investing in pre-IPO startups. Congrats on making it so far though you’re not done quite yet.
With that, thanks for following us through the funding phases and keep an eye out for our next article where we’ll bring you through the journey of going public!