6 Startup Funding Stages and How to Get Them
Startup founders need to understand the startup funding stages. In the startup world, many terms may be unfamiliar to some people, even to the startups business people themselves. The founders need to understand these terms, especially if they do have the intention to grow big and connect with various parties, including venture capitals or global business partners.
Startup Funding Stages that must be Known
Startup funding is done in stages. Perhaps many of you have often heard the terms “initial funding”, “series A”, “pre-series B” and so on. The following is a brief explanation of each stage:
This stage is usually a startup founder using funds from his savings to run a business. Funding at this stage is usually taken by startup founders when starting a business. However, there is a drawback of this funding, which is limited venture capital.
2. Initial funding (seed funding)
When a startup starts, it will need funding so that the business continues to grow. This funding is obtained from external investors, which means that they will get a certain portion in return. External funding is carried out after startup and investors agree on the company’s value (valuation).
3. Series A funding
At this stage, the startup that you started has started to reach a fairly high level. This phase is a stage of startup funding that requires startup founders to broaden their reach and provide the characteristics of their products or services.
If you reach this stage, your job is to pay attention to the expansion of products or services in terms of features or services provided to the market. Innovations are needed at this stage to develop.
At this stage, your startup usually has begun to open branches in several other places to expand product expansion both nationally and internationally. It is at this stage that you begin to understand how to raise funds and begin to open connections with angel investors and venture capitalists.
Generally, the source of funds at this stage is indeed the angel investors and venture capitalists. These investors are looking for startups that can turn good ideas into profitable businesses.
4. Series B funding
This stage usually occurs when your startup is between 2 and 4 years old. Usually, if it is already at this stage, a startup will use the funding it gets to expand the business to a wider market. But not many startups make it to this stage.
5. Series C funding
When a startup is looking for series-C funding, it means that the startup has developed very well. Funding at this stage is usually used to create new products, reach a wider market, or even acquire other startups.
Usually, investors will be happy to inject the funds they have for startups with very good prospects. Investors expect profits that are more than just the money they invest.
Initial public offering; a term where a startup finally “goes public”. When a startup has managed an IPO, it means that their shares are free to be “bought” by the public through the stock exchange. Normally, startups need a minimum of 5-10 years before finally venturing for an IPO because the process is very complicated.
The term “round” is also closely related to funding, which is to illustrate that at every stage of funding, startups open up the opportunity for anyone to become an investor. Each startup funding round has a certain milestone.
Funding Based on the Type of Investors
There is also the term funding round which is based on the type of investor. Some can also be correlated with the funding category based on the stages. Here are the reviews:
1. Angel round
Funding in this round is provided by individual investors, groups of individual investors, partners, or families in small amounts at the beginning of the startup establishment. Usually, this funding is equated with pre-seed funding.
2. Corporate round
This funding is given by a company to startups. Can be done at any stage, the aim is to build a strategic partnership. For example, a digital wallet company provides investment in e-commerce startups, so that the startup will utilize the digital wallet product as a payment option in the application.
3. Venture round
Provided by venture capitalists at an advanced stage. This term is also commonly used if startups and investors have not yet found an investment agreement in series a, b, c, or others. Venture capital collects funds from limited partners, which consist of companies, private equity, and others.
4. Private equity round
Funding is obtained from private equity, which is an investment company that collects funds from companies or certain parties. Generally entered into an advanced stage with a very large value.
5. Debt Funding or Debt Financing
This is a capital loan that is provided in convertible notes for startups that are already at an advanced level. In a certain period, the funds can be returned with the agreed interest agreement, or it can also be converted into share ownership.
6. Growth Fund
Advanced funding is provided by investors to accelerate established businesses, usually in series A and above. Not infrequently investment is carried out through a joint funding initiative that involves more than one venture capital.
The Instrument in Startup Funding
Investors provide investment to startups through several instruments. In Indonesia, there are two of the most popular, namely debt and equity. First, debt, the model is different from capital loans provided by financial institutions such as banks, because repayments are not necessarily with money and interest on loans.
In Indonesia, the most popular mechanism is through a convertible note (some refer to it as a convertible loan). The convertible note contains a debt return agreement, can be with money and equity options as a conversion of investment funds provided.
Some have a certain period, some are more flexible in terms of deadlines. There are many factors behind the issuance of this agreement. Most often, for early-stage startups, they have not yet come to light about valuations. Temporarily considered debt until one day when the valuation has been successfully calculated will be converted to a percentage of equity or shares.The second instrument is equity. This is clear, for startups that are already established and have calculations regarding valuation. Investors provide funds, then the startup will allocate a percentage of shares to each investor. Those are the startup funding stages that must be known so that startup founders can take steps to advance their business.
(Read also: 7 Tips for a Successful Startup You can Try )