You might have an idea you believe is worth billions, but to work on it you need funding. Like every other startup, you’ll definitely need funding to develop, launch and scale. We will be covering startup funding in detail. I will try to keep it as simple as possible so that it is easier to understand and digest.
What is Startup Funding?
Startup Funding is the capital or money required to develop and grow. You can get funded in a myriad of ways. It is important to know when and what means to go for.
The reality of Startup Funding
Funding has been misunderstood by a lot of startups out there. Founders romanticize the idea of funding and consequently forget the important bits to consider before all of it.
Make sure your product is ready and you have traction before you seek external funding. Investors will not invest in your idea until you have a prototype ready with some solid traction. Traction is basically how many users are using your product. There has rarely been an instance when a startup raised capital with no traction or prototype. Investors look for idea proof in numbers, it is as simple as that.
Secondly, you need to have a fully functioning founding team before you seek funding. The other thing investors look at after idea proof is the team itself. You can’t expect investors to bet their money on an undeveloped team. Therefore don’t go raising capital without a solid team.
Thirdly, bootstrap, bootstrap, bootstrap. Adopt the mentality of bootstrapping for as long as you can. You need to avoid raising money for the wrong reasons or raising money too early. An early valuation of your company can harm it more than you think. Some other options you can explore are asking friends and family for money, using crowdfunding platforms like Kickstarter and applying for government grants. You can also apply for accelerators if you are willing to give a little equity. Accelerators not only provide you capital, but they also open up their resources and networks for you.
Finding investors is the tricky part. Use your networks and reach out to as many people as you can. Use online networks like LinkedIn to connect with relevant people. Check if they are actively investing and then approach them. Do not email them. Investors do not respond to cold emails. Instead, make a warm introduction, and then ask them if you can send them your pitch deck. Also, attend startup events. Make connections and friends there. Expand your network. Your accelerator will open up their connections as well. Make use of them.
Even with a prototype with traction ready, don’t expect you’ll get an investor on board immediately. You probably would have to go through 100 investors perhaps before one finally likes your idea.
This is a common terminology which you must have heard frequently. Seed Funding simply means raising capital in the early stages of the startup. It is called “seed” because money is obtained even before you are generating revenue. It is advised to not give away equity in your seed round, instead make do with convertible notes. One of the most common forms of seed funding is through Angel Investors. They tend to appreciate riskier ventures and invest to get a return.
Series A Funding
Once you start to have consistent performance in the form of good tractions and revenue numbers, you can go for Series A funding. With series A funding, you can scale your business and enter into new markets. In this round investors look for great ideas and a good company strategy. They want the business to turn into a successful highly profitable one. Investors in this round come from traditional Venture Capitalist firms. Expect to give away some equity in this round.
Series B Funding
In this round, the focus is to take the business to the next level. This is done by expanding market reach. Series B funding is used to grow the company to meet the levels of demand. Growing and scaling a business means hiring new talent, advertising, marketing, sales and getting quality tech and support. This is a rather expensive ordeal, hence the need for Series B funding. You will be giving away some equity again this round.
Series C Funding
Businesses that make a move for Series C funding are already quite successful. They will take additional funding in order to develop new products, enter into even more markets, or maybe to buy out other companies that are competitors. The focus is to rapidly grow and scale the business.
Startups rarely go beyond round C. When they do it is either because they are looking for an additional round of funding before the company goes public, or their needs were not met in the previous rounds. As in the previous rounds, investors will be taking some equity in this round as well. So it is important to limit your rounds as much as possible. You do not want your equity diluted to a minute amount.
As you can see, the startup funding journey is an important one. Make sure you are familiar with all the particulars and avoid making mistakes that may harm your business in the future.
Also see: Common Startup Mistakes