When it comes to raising capital, it is critical to know when to ask for what.
Entrepreneurship is one of the greatest things about our society – anything is possible with a good idea and some hard work. It does take more than that to succeed, however. In this article, you will learn about the different rounds of investment, where the money should be coming from – in other words, who you should be asking, and how much.
Understanding how this all works is going to be important for entrepreneurs looking to advance from any stage to the next. If you want to be successful in your next pitch – then it is helpful to know what they are expecting from you. Let’s dive in.
Pre-Seed and Seed Money
Pre-seed money and seed money are related to the idea stage of a start-up. Pre-seed money is usually invested by the founder or their family and friends. It is spent trying to get the idea off of the ground. Prototypes for the product and a proof of concept are the goals here.
It is important to note that just because it is your own money, doesn’t mean you should simply throw cash at the project. Investors down the road in the process are going to be asking you how much you spent on this, and it is in your best interests to be able to prove that you are capital-efficient. If they are going to be giving you their money, they need to see how you do with your own, so be wise and be frugal.
Don’t waste money on patents or lawyers at this stage as that will be a big red flag to potential investors when you get further on in the investing rounds – you just need to prove that this product works and has a place in the world.
Seed Money
It isn’t always necessary to approach investors at this point, but it can be. Seed money typically will come from bank loans or early investors AKA angel investors.
This is still within the idea stage of the product, and the goal of this round is to get it to market. At this stage of funding, you will typically be looking for anywhere between $10,000 to $2 million.
Remember, less is more – always try to maximize capital efficiency. This money is to be spent on product development, manufacturing and marketing costs.
This is the money you will use to bring your product to the world. Every product is different and comes with its own unique set of challenges.
Sometimes it is beneficial to focus on getting a stripped-down version to market sooner, rather than letting it sit forever in the costly research and development phase. This is known as a minimum viable product (MVP).
This will focus on core functionalities and introduce more features as time goes on. It allows the customer to give feedback and develops the relationship early on.
An MVP has a few major benefits including capital efficiency. That term keeps coming up because it is very important – investors are most interested in one thing: return on investment (ROI). The sooner you can get a product to market and producing ROI, the better.
This strategy tends to be software and technology-focused, and won’t work for every product, but it is a good concept to bear in mind when taking an idea to the real world. There are many well-known seed money investors like Entrepreneur First and Y Combinator to name 2.
Round A
At this point in the game, the business or startup has established itself as a business and is not just an idea anymore. Early-stage funding is going to be for startups and entrepreneurs who have a proper strategy for growth.
The goal for Round A funding is to complete the development phase and move into the growth stage. This is where it’s time to make a name for your business. Round A funding will generally come from venture capital firms and ranges from $2 – 15 million dollars. This money is used to grow a customer foundation that is solid and growing reliably. When those criteria are met, it is time for Round B.
Round B
This where you throw the gasoline on the fire so to speak. Round B funding is used to transcend the business from a startup to a fully established company. The business model has become well developed as has the product. This is the last round of the early stage, and the investment range can vary wildly depending on the numbers and the situation. $7 – 10 million dollars is ballpark range but investments can go way over the upper number.
At this point, the company has ceased to meet the original definition of a startup and is now well known and successful. A couple of firms that are known for early-stage investing are Insight Venture Capitals and Accel Sequoia Capital.
Getting out of the early stages is a huge accomplishment, and not many startups reach this phase. When it becomes time to think about developing new products and continuing expansion, it may be time to consider late-stage funding.
Rounds C & D
Round C funding is used to build on success. The startup may wish to acquire other companies or open up in new markets or regions. Round C is all about expansion, and a company that is ready for this stage holds a valuation of at least $100 million. Round D is really more of a extension of round C, which is why they have been grouped together.
At this stage in the game the company may be thinking about going public, which is another way to raise capital. A publicly traded company can gain a massive amount of capital very quickly. To go public a company must develop an initial public offering – which is an extensive process that will require its own article!
A Roadmap for Capital Raising success
From the ‘Aha’ moment that started it all, until it’s time to think about going public, there are specific criteria that investors look for to determine if funding is right. Hopefully, with this guidance, you will know when and who to ask, for how much.
If you have a good idea and aren’t afraid to work for it, you can make your dreams a reality.