As with many aspects of a startup there are different startup funding stages. Here’s everything that you need to know about each stage.
While nearly 60% of startups are self-funded, companies who reject investors often stay underfunded and struggle to grow. Knowing the startup funding stages can help you ensure each decision sets you up for future funding.
No matter what industry your startup focuses on, you’ll need to map out a funding strategy before you start your business. Without the ability to secure startup funds, you won’t be able to hire employees, meaning you won’t be able to grow.
If you’re starting to write out your financial roadmap now, you’re on the right track. Get to know the 6 major startup funding stages and keep your business positioned to take the next step.
1. Self-funding or Bootstrapping
It’s one of the more obvious stages of building your startup. In this phase, a business owner relies on their own funds to set the business up to produce.
Most business owners start with at least $10,000 in equipment, tools, or cash to test their first products. If you’re pivoting your hobby into a legitimate business, you might already have what you need to start your company.
If a founder transitions from a high-salary job, they could start their business with $100,000 and get the first few months stress free. A founder who has made an investment will attract other investors.
With every investment your business has, even from your own pocket, you’ll be able to show your next investor there’s commitment to your company.
2. Ask Friends And Family
Through all of the startup funding stages, this one can either be the hardest or the easiest. Some people have a hard time asking for help from their closest friends and family members. Other business owners won’t think twice about it.
In all likelihood, your friends and family will be more than happy to help you achieve success. For a small fee, they will get access to your company as it grows and feel connected to the business.
For some people in your close circle, it could inspire them to work on their own business idea.
Use your email list and your network. Offer great convertible stock options to your biggest donors.
Be sure you maintain control over your equity. Giving away too much during this phase could hurt you later. Plan to cap how much you offer at around 5%.
3. Seed Funding
This is the first time you’ll be raising outside capital for your startup. You’ll want to link up with either individual investors or a group of angel investors. Angel investors will also provide value beyond the size of the check they write.
Angel investors have usually founded their own companies. They’ll know how to begin and later on, how to exit.
They have enough net worth to give you a second round of funding after you deliver from the first. Startups often fail when they realize they need more money than they initially asked for. Starting off with a low number and then showing results allows you to ask for a higher number later.
They will want to see you work hard following their investment. Invite them to any events you have, give them the first preview of any new products or inventory, and be open to their advice.
During this period, you could give up to 20% of your company’s equity to your investors. So long as you’re raising the first $1-2 million to start your company, that’s not a bad deal.
4. Early Growth Stage
This is where you’ll want to get venture capitalists interested in your company. Early growth is contained in a period called “Series A”. You want to get the base of your company running smoothly on these initial investments before you move on to series B.
At this point, you’ll have a formal board making the important decisions about your company. Rather than friends and acquaintances packing your board, you’ll need to have experienced CEOs and CTOs that can advise your direction.
Be sure through this process you become more acquainted with the expectations of your company and your board. As you add members, you could make yourself obsolete. If you don’t become as professional as the people you hire, you could lose control of your company.
5. Expansion Phase
When you make it to this stage, you’ll have a strong idea of what your month to month earnings will be. You can then invest based on your company’s history. At this point, you can see how to scale your business.
After you pay expenses, you should be netting millions in profit. While you may no longer control all of the stock in your company, you’ll still have around 10% and have a strong voice on your board.
You may see some people come and go; you may weather some tough negotiations, but if you’re making $5 million a year, you’ll survive.
6. Mezzanine Phase
At this point, you’ll prepare your company to go public. You could be valued at hundreds of millions of dollars if not billions. Your company could have hundreds of employees working all over the globe.
You’ll have to abide by some rules to get work done. You may want to consider offering a public stock option. Staying small has its advantages, so choose wisely.
The Startup Funding Stages Take Time
To ascend this ladder could take decades or generations of ownership. In the context of Silicon Valley, these phases could happen over just a few years. It all depends on how you structure your business and what you can offer. You might be surprised at how fast you grow.
We offer a select few companies development effort for partial equity and partial payment. If you’re ready to build a proof of concept for all of the startup funding stages, contact us to get started today.