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Types Of Fundraising For Startups


May 6, 2021, 10:47 a.m.

Fundraising still stands as a barrier for many early-stage startups. Mostly this happens at the pre-seed and seed funding stage. This stage of funding ranges from pre-seed, seed, series A series B series C, crowdfunding and venture capital, accelerators and incubators, etc.

In this edition of our series, we will be looking into the various types of funding for an early-stage startup.

  1. Series Funding

Series funding defines the stages when a startup raises rounds of funds each one higher than the next and each one increasing. The series funding ranges from A-D detailing the various stages of the round of investments.

  • Series A Funding; Startups attain some form of traction after they have crossed the seed stage of fundraising, this can come in form of numbers, reviews, and any other key performance Indicators. This is then able to make them ready for the next stage of funding which is the Series A round. The typical valuation for a company raising a seed round is $10 million to $15 million. Series A round of funding usually comes from venture capital firms, although angel investors may also be involved. Also, most companies use equity crowdfunding for their Series A.
  • Series B; To get ready for the Series B round of funding a startup will have to reach the point where they have already found their product/market fit and needs help expanding. The startup at this stage should be easily scalable e.g. to be able to grow from 100 users to 1,000 users over a given period. Series B funding usually comes from venture capital firms, often the same investors who led the previous round. Because each round comes with a new valuation for the startup, previous investors often choose to reinvest to ensure that their piece of the pie is still significant. Companies at this stage may also attract the interest of venture capital firms that invest in late-stage startups.
  • Series C; Business considered as ready for Series C round are those that are doing well and are ready to open to new markets, sometimes are the last round some companies raise but others do go on to raise Series D and E, Valuations at this stage get higher standards sometimes based on, How many customers does the company have, how much revenue has the company generated, what is the company’s current and projected growth rate? Series C funding typically comes from venture capital firms that invest in late-stage startups, private equity firms, banks, and even hedge funds.
  1. Crowdfunding

Crowdfunding is the method of funding a project or venture by raising capital from a large number of people or through the collective effort of friends, family, and individual investors. With this approach the business can tap into a collectively large pool of investors, this is mostly done via online platforms, social media, and a crowdfunding platform and through networking

This fundraising approach is visioned as the entrepreneur and the pitch at one end and the investor at another, giving the entrepreneur the platform to showcase their pitch and product. This approach streamlines the traditional model which is, entrepreneurs, spend months sifting through their networks scouting potential investors.

With crowdfunding, it’s much easier for entrepreneurs to get their opportunity in front of more interested parties and give them more ways to help grow the business.

3. Venture Capital

Venture capital is fundraising is the type where funds that are invested in startups and small businesses that are usually high risk, but also have the potential for high growth. The goal of a venture capital investment is a very high return for the venture capital firm, usually in the form of an acquisition of the startup.

Venture capital is a great option for startups that are looking to scale quickly. Because the investments are fairly large, your startup has to be prepared to take that money and grow. Venture capital is usually run by partners who have raised a large amount of money from a group of partners to invest on their behalf. The LPs are typically large institutions, like a State Teachers Retirement System or a university who are using the services of the VC to help generate big returns on their money.

The partners have a window of 7 to 10 years with which to make investments, and more importantly, generate a big return. Creating a big return in such a short period means that VCs must invest in deals that have a giant outcome.

These big outcomes not only provide great returns to the fund but also help cover the losses of the high number of failures that high-risk investing attracts.

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