The Startup Funding Lifecycle – From Pre-Seed to Liquidity Event

  • Written Written by Shubhika Sundriyal 31 January 2024 | 4 min read
  • Editor's Note :

    Understanding the startup funding cycle can be challenging. The various stages, from pre-seed to Series A, B, C, and IPO, everything may seem overwhelming at first glance. In this blog, we aim to simplify each round, guiding you through the startup funding lifecycle with clarity and ease.

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Wondering how startup dreams turn into success stories and secure the crucial financial backing needed for growth?

Well, a company begins with the founders investing their own resources, which is called the seed stage. It then advances to the early or growth stage, attracting support from investors and venture capitalists who pump in additional capital to fuel the startup. As the startup progresses, it gains maturity, moving towards two options: launching an Initial Public Offering (IPO) or being acquired by a larger entity.

So yes, this startup funding lifecycle is all a game of securing financial backing. In this blog, we’ll explore each stage.

Let’s get started!

startup funding rounds

Source: equitynet

The Pre-Seed/Bootstrapping Stage

In the initial stage of fundraising, known as the pre-seed funding round, founders present their business concept to potential investors. Usually, pre-seed investors include friends, family, angel investors, pre-seed venture capitalists, and crowdfunding sources.

Given the absence of financial data at this early phase, investors base their decision primarily on the merit of the idea and the competence of the founding team.

How to Prepare for Pre-Seed Funding?

To prepare for pre-seed funding for startups, you need to have a compelling pitch. Develop a detailed business plan, highlighting market potential and competitive advantages. Build a prototype or minimum viable product to validate feasibility. Also, establish a solid team and showcase relevant expertise.

Create a realistic financial model and outline clear milestones. Engage with potential investors, mentors, and advisors to garner insights and support. Be prepared to showcase a scalable business model during investor meetings.

Next up is seed-stage funding.

Seed Stage

The seed funding for startups is where the company’s product takes shape. However, for this, it needs further capital injection to test the market-product fit, develop the product, and bring operations up to speed.

Mike Belsito, in his book, Startup Seed Funding for the Rest of Us: How to Raise $1 Million for Your Startup - Even Outside of Silicon Valley, writes “When we’re considering investing in a startup, we first want to know that the entrepreneur has a clear understanding of the market. Who are the major players? What about this market is ripe for disruption? What is this startup’s unfair advantage to disrupt this market? In the first conversation we have with a company, these are questions that we’re looking for clear answers to.

Break down your market strategy, showcasing the growth potential that lies ahead. Investors want to see a stellar team, so highlight your squad's expertise and passion. Conclude with a call to action, leaving investors eager to be part of your journey.

Early-Stage Funding: Series A and Series B

Series A funding is an important milestone in the lifecycle of a startup as the capital raised during this phase is earmarked for essential needs such as recruiting top talent, expanding inventory, and acquiring necessary equipment.

To secure Series A funding, you need professional investors with a meaty amount of capital to help you kickstart scalable operations. This is a formal funding round sourced from external parties. Apart from funding injections, these investors also bring expertise and valuable connections to the table. In return for their support, the founders will give a portion of their equity.

Once a startup has successfully navigated the initial stages, establishing a solid customer base and gaining market acceptance, the focus shifts to further expansion. With Series A fueling the initial growth, the startup now sets its sights on Series B funding to take its operations to new heights.

Series B funding will help you in scaling operations across diverse markets and geographies. The increased funding facilitates an acceleration of operations and delivery capabilities. At this stage, the startup can present tangible figures and metrics, showcasing its product/idea's performance to potential investors. With a robust customer base and a stable revenue stream, Series B funding becomes instrumental in providing the necessary boost for sustained growth and market dominance.

Growth Stage Funding: Series C and Beyond

During the late-stage funding phase, a company seeks substantial capital infusion to push its expansive growth initiatives. This critical financial juncture often coincides with preparations for an Initial Public Offering (IPO) or an acquisition. By this stage, the startup has firmly established its market presence, achieving significant milestones that instill confidence in potential investors.

Who are these late-stage investors and venture capitalists?

These are large corporate investors, financial institutions, private equity firms, investment bankers, and hedge funds.

There is no set limit on the number of funding rounds a startup can go for. This flexibility allows the company to secure additional funding whenever necessary, whether it be for global scaling, the introduction of new products, or the acquisition of a competitor. The subsequent funding rounds, starting from Series D and beyond, serve as avenues for further financial backing to support the startup's strategic objectives.

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The IPO Stage

An Initial Public Offering (IPO) is a significant milestone for a startup, as it involves making the company's shares accessible for public purchase on the stock exchange. The primary goal is to rapidly secure substantial capital. Simultaneously, it serves as a liquidity event for existing shareholders and investors, allowing them to sell and monetize their shares.

The IPO process involves the company's shares being officially listed on the stock exchange, opening them up for public trading.

In the lead-up to an IPO, meticulous preparation is essential. The company undertakes a rigorous process, assembling a dedicated team of lawyers and accountants to compile financial statements. Additionally, thorough preparation for an audit is conducted as part of the comprehensive groundwork for the IPO.

Wrapping Up

Understanding the funding game can be challenging. When to go in for the next round of investing? How much to raise? How much equity to dilute at each stage? Everything poses complex considerations at every turn.

But, don’t worry. With a solid understanding of the fundamentals, you'll be well-equipped to identify the opportune moment for gearing up for the next investment round while enhancing operational efficiency. The crux lies in continuous learning and exploration.

As founders aspiring to scale startups into large enterprises, the key is to maintain focus, adapt to the end-user requirements, and commit to expanding your knowledge base. Also, monitoring competitors and staying attuned to the latest industry developments will help you stay relevant.

So, stand tall, stay focused, and keep pushing the boundaries of excellence!

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