In turn, these factors impact the types of investors likely to get involved and the reasons why the company may be seeking new capital. The earliest stage of funding a new company comes so early in the process that it is not generally included among rounds of funding at all. Known as "pre-seed" funding, this stage typically refers to the period in which a company's founders are first getting their operations off the ground.
The most common "pre-seed" funders are the founders themselves, as well as close friends, supporters, and family. Depending upon the nature of the company and the initial costs set up with developing the business idea, this funding stage can happen very quickly or may take a long time.
It's also likely that investors at this stage are not making an investment in exchange for equity in the company; in most cases, the investors in a pre-seed funding situation are the company founders themselves. Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises; some companies never extend beyond seed funding into Series A rounds or beyond.
You can think of the "seed" funding as part of an analogy for planting a tree. This early financial support is ideally the "seed" which will help to grow the business. Given enough revenue and a successful business strategy, as well as the perseverance and dedication of investors, the company will hopefully eventually grow into a "tree. With seed funding, a company has assistance in determining what its final products will be and who its target demographic is. Seed funding is used to employ a founding team to complete these tasks. There are many potential investors in a seed funding situation: One of the most common types of investors participating in seed funding is a so-called "angel investor.
For some startups, a seed funding round is all that the founders feel is necessary in order to successfully get their company off the ground; these companies may not ever engage in a Series A round of funding. Once a business has developed a track record an established user base, consistent revenue figures, or some other key performance indicator , that company may opt for Series A funding in order to further optimize its user base and product offerings.
Opportunities may be taken to scale the product across different markets. In Series A funding, investors are not just looking for great ideas. Rather, they are looking for companies with great ideas as well as a strong strategy for turning that idea into a successful, money-making business. The investors involved in the Series A round come from more traditional venture capital firms. By this stage, it's also common for investors to take part in a somewhat more political process.
It's common for a few venture capital firms to lead the pack. In fact, a single investor may serve as an "anchor. Angel investors also invest at this stage, but they tend to have much less influence in this funding round than they did in the seed funding stage. It is increasingly common for companies to use equity crowdfunding in order to generate capital as part of a Series A funding round. Part of the reason for this is the reality that many companies, even those which have successfully generated seed funding, tend to fail to develop interest among investors as part of a Series A funding effort.
Indeed, fewer than half of seed funded companies will go on to raise Series A funds as well. Series B rounds are all about taking businesses to the next level, past the development stage. Investors help startups get there by expanding market reach.
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Companies that have gone through seed and Series A funding rounds have already developed substantial user bases and have proven to investors that they are prepared for success on a larger scale. Series B funding is used to grow the company so that it can meet these levels of demand. Building a winning product and growing a team requires quality talent acquisition. Bulking up on business development , sales, advertising, tech, support, and employees costs a firm a few pennies. Companies undergoing a Series B funding round are well-established, and their valuations tend to reflect that: Series B appears similar to Series A in terms of processes and key players.
Series B is often led by many of the same characters as the earlier round, including a key anchor investor that helps to draw in other investors. The difference with Series B is the addition of a new wave of other venture capital firms that specialize in later stage investing.
Businesses that make it to Series C funding sessions are already quite successful. These companies look for additional funding in order to help them develop new products, expand into new markets, or even to acquire other companies. Series C funding is focused on scaling the company, growing as quickly and as successfully as possible. One possible way to scale a company could be to acquire another company. Imagine a hypothetical startup focused on creating vegetarian alternatives to meat products.
If this company reaches a Series C funding round, it has likely already shown unprecedented success when it comes to selling its products in the United States. The business has probably already reached targets coast to coast. Through confidence in market research and business planning , investors reasonably believe that the business would do well in Europe.
Perhaps this vegetarian startup has a competitor who currently possesses a large share of the market.
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In this case, Series C funding could be used to buy another company. As the operation gets less risky, more investors come to play. In Series C, groups such as hedge funds , investment banks , private equity firms and big secondary market groups accompany the type of investors mentioned above. I've picked up a few nuggets of wisdom about how to close a deal from my own fundraising experiences and from observing clients raise money.
Here's my advice:. Pick a closing date, then don't enforce it. When raising large sums of money from venture capital firms and institutional investors, closing dates are critical. This explains why your lawyer will give you financing documentation for your startup round of funding that has a closing date clause.
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In practice, angel investors and other individuals who'll support your business will ignore your closing date and send you the money when they feel like it. Unless you're convinced that your financing round will be oversubscribed by too much demand, your closing date is likely to be a moving target. Nevertheless, investors like to see a closing date because they like to feel that other investors are interested in your business and investing at the same time. You should ask your lawyer to modify the standard closing date clause to read "The closing date is [some date in the near future] or another date that is mutually agreeable to both parties.
One of the greatest challenges that entrepreneurs face is answering the question posed by your prospects, "How many other investors are committing money at this closing date?
Provide investment options. Flexibility is critical when dealing with non-institutional investors. Take-it-or-leave-it terms seldom work because the motivation for each investor will vary. If you're raising money in the form of debt, it's better to offer two or three options for participation in the round: If you're raising money in the form of equity, use convertible debt rather than preferred stock for your friends-and-family round, and be sure to provide some flexibility on the investment amount.
Anticipate follow-up meetings. To keep the courtship process with investors moving forward, it's best to end each meeting with a definite plan for the next meeting. Even if you can tell your entire story in one meeting, it's better to spread it to two or three meetings since that might be how long it takes for the investor to get comfortable with you. In my experience, it's best to make this introduction at the end of the courtship to help you close, rather than early in the process to help the investor conduct early due diligence.
Ask about doubts. At the second meeting, I find it's useful to end the meeting by asking the straightforward question: This information is also useful when prepping your reference partners for subsequent calls. Stop selling. It's easy to get in the habit of selling. So much so, in fact, that the sales culture of fundraising can seep into your interactions with investors even after they've decided to invest and are simply waiting for the paperwork to be completed.
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Once they've made the decision to invest, step back and let the process happen without continuing to sell it. Don't forget to ask for the check. When raising money, it's easy to get tied up in answering the questions posed by the investors, then get tied up in the negotiations and paperwork, then get tied up in making sure the relationship with your investor continues to be sound after the negotiations are complete. During all these interactions, it's also easy to forget that the purpose of the process is to get the money. You may find that you'll get the funding more quickly if you ask for it earlier.
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One way to ask for the check is to ask your investor whether he plans to make a wire transfer or send a personal check so you can decide if he needs to receive your bank wire transfer details. It might be presumptive to ask this question too early, but it tends to move the dialogue along very quickly. And remember, the deal isn't closed 'til the money's in the bank. My Queue. There are no Videos in your queue. See Latest Videos. There are no Articles in your queue.
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