The dream is that a start-up begins with a brilliant business idea and, from humble beginnings and with the support of family and friends, the company proves its worthiness and steadily grows. Over time it expands even more, gaining investor support and overtaking its competitors to become highly valued, revealing the possibility of faster expansion and an Initial Public Offering.
So what are the funding stages for a start-up such as a FinTech seeking investor support? Let’s explore them…
The earliest stage of funding a new company occurs so early in the process that it’s often not included among the rounds of funding at all.
Known as pre-seed funding, this stage typically refers to the period when a company’s founders are first getting their operations off the ground. Accordingly, the most common pre-seed funders are the founders themselves, together with friends, family and their supporters.
There comes the time, however, when ‘bootstrapping’ is not enough and at this point external sources of financing are required if the project is to continue.
Seed funding is the first official equity funding stage. Analogous to planting a tree, this early financial support is the ‘seed’ that helps grow the business. Seed funding helps the founding team to carry out finance market research and product development.
Beyond family and friends, there are many potential contributors to seed funding, particularly at this stage angel investors, but also accelerators and venture capitalists.
Seed funding signifies the first potentially volatile stage in a start-up’s development. Up to half of new companies never extend beyond seed funding into the Series A round. If a start-up runs out of money before being picked up by investors, it’s known colloquially as ‘running out of runway’.
The amount of capital generated for such start-ups varies greatly but might range up to US$2 million on a valuation of $5-7.5m.
Series A funding
Series A funding is the first serious venture capital funding for a start-up, and the name refers to the class of preferred stock sold.
It’s an important milestone and companies need to demonstrate they have a minimum viable product and a workable strategy, not just a great idea or team. The Series A investment provides venture capitalists, in exchange for capital, the first series of preferred stock after the common stock issued during the seed round. Such financing buys time for the start-up to develop its products, team and begin to execute on its go-to-market strategy.
Getting Series A funding is generally achieved by joining an accelerator, networking with influential angel investors and venture capitalists, or equity crowdfunding.
It’s not uncommon for a few venture capital firms to lead the way, and a single investor can serve as an ‘anchor’ for others to follow: once a company has secured its first major investor, it may find it easier to attract additional investors to support the start-up. Conversely, losing a first investor can be a hammer blow because there’s always the risk that others might pull the plug on their investment too.
It’s risky to generalise but the amount raised is often in the $2-15m range and might be based on a valuation of around $20m.
Series B funding
Whilst the Series A funding round is all about getting the team together and an awesome product developed, the Series B Funding round is all about taking the business past the development stage and to the next level.
At this stage, the product (or service) is already being sold in the market and the additional injection of finance will be used to scale up and gain market share.
To be successful, the fledgling company will need to show solid early achievements. The amount raised at this stage is often in the $25-35m range.
Series C funding
A Series C funding round is designed to make the start-up appealing for acquisition or to support an IPO, and Series C investors are only interested in breakout companies that have already demonstrated significant traction in their sector.
By way of example, the typical amount raised might be in the $50-60m range on a company valuation of $120m, and common investors include late-stage VCs, private equity firms, hedge funds and banks.
Beyond Series C, there are further possible options such Series D, Series E, mezzanine finance and bridging loans.
In reality, of course, the path for every company is different, as is the timeline for funding. Many start-ups spend months (or even years) in search of proper funding, while others – particularly those seen as truly revolutionary or attached to people with a proven track record of success – may bypass some of the funding rounds described above and move through the process of building capital significantly more quickly, leading to roadshows to promote going public with an eventual IPO.