It is not just enough to have a vision. It takes more than that for an entrepreneur to build a business empire. Funding a business is like planting and watering a sapling to help it grow into a beautiful tree and bear fruits. As there is no guarantee that a plant would survive, it holds true for business too. The feasibility of the business idea in the real-time world is the determinant. So, in this article, we will understand how businesses are funded, the different levels and processes, and the interest groups who fund them.
Basically, funding for a business happens in batches, and it entirely depends on the startup's performance. Many entrepreneurs get involved in bootstrapping (funding their own business) at the initial stage or get funds from friends or family. However, when the customer base increases or the owner decides to expand the startup funding series like A, B, C, D, or E happens after a certain point. At this point, if the startup becomes popular and holds a significant position in the market, it opts for an initial public offering(IPO) in the exchange markets.
Capital is an essential concept in the growth of a business. Owners raise this capital through different rounds of funding. Investors who believe in the business concept fund these businesses in return for a stake in the business. The external funding reduces the owner's stake in the startup, and the investor gets a say in the business affairs to the limit of his investment. The company's valuation, growth potential, market penetration prospects attract different investors to carry on the funding process.
Different Types of Funding
Here we will look into the phases and conditions of funding and the other vital factors alongside steps involved in fundraising.
This type does not count as an official funding process as it only implies that the business idea is operational. Hence, owners, their families, and friends contribute to funding the setup costs. The startup size is small, and the amount raised is significantly less.
This stage marks the beginning of the funding process. It is termed as replicating the logic of planting a seed. Startups can get funds from family, friends, angel investors, or venture capital firms. Many businesses that don't excel past this phase shut off their operations. Some startups also mark this as an end of the funding process, as the seed money raised is enough for the growth of the business. The seed funding can raise anything between $10000 to $ 2 million.
Series A Funding
A startup that has fared well has generated good revenue, increased its customer base, and has got good visibility is eligible for Series A funding. Investors here are keen to know the plans of expansion of the startup to eye on a long-term profit. Hence, it is tricky to get the first investor for this process, known as the anchor (more investors follow it), because of the risk factor. It is seen that less than half of the companies from seed funding proceed to Series A funding, so equity crowdfunding at times is a part of Series A. The amount raised in this round is between $ 2 mn to $ 15mn, thus raising the startup valuation to up to $23 mn. Famous venture capital firms like Sequoia Capital and Benchmark Capital participate in these rounds.
Series B Funding
A company that proves its position and shows signs of further growth through rising demands for its products and services marks itself for a Series B funding. Investors are willing to look into the company profile to help it spread its reach to more customers through uplifting its sales, promotion, and technology. Plus, a better workforce implies giving good pay, which can happen through funding. So in this phase, the players are the same, i.e., primarily venture capitalists who can invest between $7mn to $10 mn and give the company a valuation ranging from $30 mn to $60 mn.
Series C Funding
The companies with a vision to diversify or expand their bases mostly go for this round of funding. They are very well-established and on the lookout for developing more products, delving into a different business, or acquiring another business. They have a niche hold in the market and attract investment bankers. These private equity firms or investment bankers are willing to invest heaps of money to fund these companies as the risk here is relatively lower. It is often the last round for companies to raise money through investors, private firms, or bankers before making it IPO-ready. The startups can raise upto $26 mn, and this amount can take the valuation of the startup to a range of $100 mn to $200 mn. Many financial institutions chip in with funds at this stage.
Series D and E Funding
Before going public, many companies use their Round C funds to improve their valuation, product expansion, or other plans. However, some companies continue with the external funding delving into Series D and E. Now there could be two reasons for it :
- The company wants to increase its valuation before going public or simply prefers staying private for some more time.
- The company fails to meet its expectation after the series C and needs a push to prove its worth again. However, funding at this point implies a lesser valuation leading to a low stock value. This round is also called the "down round" and affects the morality of the employees and challenges them to amp up their performances.
The Power of Funding
Usually, the company stands at a valuation of $118 mn or more after a Series C funding and depicts excellent prospects in the future. Its position in the market is very significant, and its expansion strategies take the attention of the market players. The different phases of funding come with their risk factors amid ensuring prominent visibility of the startup. The funding series also gives a set of varied control to the external users over the startup. However, everything happens through the exchange process, as the investors' support in the business plan gives the startup their backing. The raised capital gives the hope of a return on equity at a later stage to the investors. So, it's a win-win for all.
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