How does fundraising work? Raising money from an equity perspective tends to happen in phases. However, the often-arduous fundraising journey is considered one of the most challenging aspects of starting and scaling a business.
Founders of early-stage businesses may ask: ‘What are the stages of funding?’, ‘What type of funding do I need?’, ‘Will it be enough?’, ‘How do I access funding as an early-stage business?’. These are all valid queries founders may consider during a business’ formative years.
Here is a step-by-step explanation of the different stages of funding and the characteristics associated with each stage of this journey.
Estimated reading time: 3:30 minutes
Pre-Seed Funding: Launching the business
Pre-revenue and fledgling businesses may embark on their investment journey by launching a pre-seed funding round.
Characteristics:
- Business valuation: £10,000 to £100,000.
- Stage: pre-revenue, R&D-related activities, such as building concepts into prototypes.
- Types of investors: owners, family, and friends and sometimes angel investors.
Often conditional on having identified a clear market opportunity with a viable product or service, or when a founder is making the first few hires, or when businesses expenses are starting to rise, this stage of funding typically generates £10,000 to £100,000.
Related Article | Flags for investment – is your business ready to fundraise?
Generally accepted as an investment round before a business receives investment from its first external and professional investor, the pre-seed funding stage is usually led by individual angel investors and loans from family, friends, colleagues and/or co-founders. In recent years, pre-seed startup accelerators have also been gaining prominence and popularity.
As a precursor to the actual seed round, pre-seed funding is often spent covering the essential costs of setup and maintenance. For example, to incorporate the business, hire key people, and develop early-stage concepts and prototypes.
Seed funding: Germination of business and concept
When it comes to the next stage of funding in the investment ecosystem, seed funding is next.
Characteristics:
- Business valuation: £3m to £6m.
- Stage: Transition from building concepts and prototypes to product/service launches, recruitment, and the first phase of revenue generation.
- Types of investors: Angel investors, friends and family, early-stage VCs, and equity crowdfunding.
Typically falling in the range of £300k to £1m, seed funding is appropriate for when the business has a scalable and working model, appointed a professional leadership team and engaged in further development of the concept.
Seed-stage funding to startups has exploded in recent years; a dramatic change that has coincided with investors writing larger cheques and a reasonable level of dilution.
The initial injection of seed money is an essential catalyst for new startups; the amount of money needed to launch and grow a business is usually well beyond the financial scope of founders and their friends and family.
High growth companies almost always need to use capital to sustain their growth. Seed funding not only allows startups to germinate but having access to a financial war chest is almost always a competitive advantage when it comes to hiring key people, communicating messages to the market through PR, and developing marketing and sales strategies.
Related Article | How to find and secure growth funding
Series A funding: First round of venture capital
Characteristics:
- Business valuation: £10m to £30m.
- Stage: Scalable business model, professionalisation of key business functions, enhanced leadership team, further development of products/services, commercialisation, cultivation of consistent revenue flows, a strong base of customer support, and growth.
- Types of investors: Angel investors and VCT/VCs.
Once a business has reached the post-seed stage of funding, what next? Well, at this point, companies seeking Series A funding must be able to demonstrate adequate product-market fit and sustained growth in annual revenue over time.
By its very nature, Series A funding requires that businesses demonstrably prove product-market fit and growth in annual revenue over time. This stage of funding is no longer so dependent on the early vision of the founder(s). On the contrary, whilst seed funding proposals are associated with the founder’s vision, Series A funding requires more accurate data.
At this point, the Series A stage of funding mostly comes from angel investors and venture capital firms who are looking for watertight business strategies that can generate revenue across different markets and geographies.
Series B funding: Second round of venture capital
Characteristics:
- Business valuation: £30m to £60m.
- Stage: Continued growth, increased market share and competitiveness and expansion into new markets.
- Types of investors: VCs and late-stage VCs.
Series B funding is the next stage of financing. By this point, the business has achieved stability, processes, systems, and controls are working well, and customers and investors are supportive.
Typically, the Series B stage of funding allows the business to increase its market share and improve its scalability and competitiveness. As the business becomes more professional and seeks to expand into new markets, financing options are available from new investors who prefer investing in a company that has matured past the uncertain startup stage.
Late-stage venture capital firms become increasingly more involved in establishing a launchpad for the business and preparing it for the Series C stage of funding.
Series C and beyond: Institutional investors are starting to circle the business
Characteristics:
- Business valuation: £100m+
- Stage: Further expansion with new product/service introductions and increased market share.
- Types of investors: Late-stage VCs, private equity, hedge funds, and other institutional investors.
Once business angels and venture capital firms have taken a large proportion of the risk in growing and scaling the business, late-stage VCs, investment banks, private equity, and hedge funds will start circling the business.
Commonly, Series C companies are looking to globalise their product/service to reach an international market. As such, significant sums of money will be invested by institutional investors to enable the business to cement its leadership position in the market.
At this funding stage, founders may also look to increase their valuation before launching an Initial Public Offering (IPO) or an acquisition.
Although Series C is often the last round that a company raises, some businesses do go on to raise Series D and even Series E rounds.
However, it’s more common that a Series C round is the final push to prepare a company for its exit via an IPO or acquisition.
Fundraising for you: How we can help
We’ve combined our experience working with a range of companies at each funding stage and an extensive network of investors to distil the information in this article.
Our iFDs have a wealth of experience supporting entrepreneurial businesses from many different industry sectors with their funding rounds. If you think we can help, please get in touch.
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