Understand the basics of investor funding rounds

Having a brilliant idea is just like stepping in the ring. It’s an achievement to get there, but the tricky part is still ahead. You now have to make it through several other rounds.

Launching a new startup means that you might need to understand how you navigate through investor funding rounds.

These moments in the business timeline are crucial. Investor funding has some basic tips to follow, so if you learn what they are, you can succeed in each.

This guide discusses the basics of investor funding rounds, including each stage:

• Pre-seed
• Seed
• Series A
• Series B
• Series C

Where you are right now is likely the ‘pre-seed’ or ‘friends and family’ stage. 

So you have an idea, maybe even a few prototypes, but you need money to get it off the ground. In the pre-seed stage, you’ll ask people closest to you to help with initial funds.

Identifying a unique selling point (USP) means your business offers something that people can’t get elsewhere. With a USP, you may find it easier to convince people to be interested in your startup. 

At the pre-seed stage, you’ll work towards something functional that you can show investors. Still, it will unlikely be the finished product or service. 

While using this money from friends or family, you’ll likely start perfecting your business idea to make it more viable for the future.

There are two options at this stage. You can offer to pay back the money to friends and family in future or offer partial ownership.

The first official stage of funding is called the ‘seed’ round. From this point, you’ll be far more likely to have to give away equity (shares) in the business.

You’ll aim to use funds for product development, which could mean testing and manufacturing. To find out who you should be targeting, look for market research money in this stage as well.

You can approach different investors in the seed funding round. Two of the most common are angel investors and venture capital companies.

An angel investor is a wealthy individual who gives funding to an early startup. They often invest in businesses that operate in industries they know well.

In addition to offering money in exchange for an equity stake, angel investors also often provide guidance and contacts to help the business. 

Angel investors either help small businesses out of a desire to give back to entrepreneurs after success or seek to make money from a startup with high growth potential.

If your startup could grow substantially, you may be able to take on venture capital investments in the seed round. 

Venture capital funds manage money for high-growth opportunities, so the companies invest in many startups constantly. They will fund your startup but look to take a percentage of the ownership for themselves.

Unlike angel investors, the main driving point for venture capitalists is financial, as they usually come from companies with shareholders themselves. So when the funds invest, they may want higher equity than an angel investor.

After your seed funding, you will have the money you need to create your business. You’ll have a working product or service and be marketing it toward customers.

Series A funding helps you go beyond a startup and become a thriving business. The stage is now for finding new markets to explore by furthering marketing, expanding to a new country, or developing new offerings.

At this stage, your business is likely to look to gather Series A funding from larger venture capitalist firms.

Some of the biggest are:

• Tiger Global Management
• New Enterprise Associates
• Sequoia Capital
• DST Global

Another way to seek money in the series A investor funding rounds is through equity crowdfunding platforms like Crowdcube. 

Equity crowdfunding allows the public to invest in your business. Your campaign can generate millions in funding from many individuals through online platforms.

Each individual becomes a shareholder in your company in exchange for their investments. In return, you’ll now have to keep them happy, which can mean offering to pay them dividends in future.

You pay dividends to shareholders out of the company’s profits. The amount each individual receives depends on the number of shares they hold.

After you move into new markets and develop more products from Series A funding, you might find opportunities to expand further. That’s when you might decide to move onto ‘Series B’ investor funding rounds.

Before starting series B funding, you will likely value your business between $30 million (£22.4 million) and $60 million (£44.8 million). 

At this stage, you benefit from success. Still, try to push further along the journey to become a market leader (most successful business in your industry).

Series B funding might be for advertising campaigns, expansion to further markets, new technology or hiring many employees. Like series A, you seek funding from large venture capital firms.

After becoming a large successful business, you may seek to acquire other companies. You might do that if you want to take over a competitor in your market or diversify your range by buying a firm in a different industry.

For significant business investment, you’ll move onto the ‘series C’ stage. You’d be an already well-established business, which means more options for getting money.

Hedge funds are investment pools of individuals’ money for investing in companies. They are different from venture capital companies as they target large businesses with less risk attached.

Banking institutions often have divisions of investment banks that use members’ money to invest in companies. Unlike venture capitalists, they use their customer’s savings, so they are likely to avoid risky startups.

Going through investor funding rounds takes time and can be challenging. As a business owner, you want to make sure you make the most of your funds.

By setting up a Countingup business account with built-in accounting software, you can manage your finances efficiently. Its cash flow insights feature means you’ll always be able to see what money is coming in and out of your business.

Countingup can help you prepare your finances before and after any funding stages, all conveniently through your phone with the app.

Start your three-month free trial today. 
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