What types of funding rounds are available for startups? In this guide, we’ll be looking at the different types of funding rounds and which type of funding is right for you.
Previously, we were reviewing the step-by-step guide to submitting an app to AppStore and publishing the one to Google Play. When you first launch your startup, you’re probably keen to do it as cost-effectively as possible.
You’ll work from home and do as much of the groundwork yourself. If you need extra support, you’ll use your own savings or borrow money from family and friends.
While funding your business yourself, or ‘bootstrapping’, works up to a point, if you want to move your business forward, you’re going to need additional help.
This is where taking part in a funding round for a startup and getting additional investment can take your business to the next level.
What is a funding round? A funding round for a startup is a way of getting investment to grow your business. You’re essentially showcasing your business to an investor who, if they like what they see, will give you the money you need to move your startup forward. Think of it like an interview for a job, but instead of a job, you’re getting funding!
In this article, we’re going to investigate the different types of funding rounds for startups available, and how they can help startups at different stages of the startup life cycle.
- Why might a business take part in startup funding?
- The different types of funding rounds;
- Pre-seed funding;Seed funding;Pre-A funding;Series A funding;Series B funding;
- C series funding;
- Initial Public Offering (IPO);
- What if I don’t want to take part in a funding round?
- In summary: funding for startups is as simple as A, B, and C!
Check our article about startup exit strategies and when is the best time to do so. But now, let’s start by looking at why startups might apply for a funding round in the first place.
Why might a business take part in startup funding?
There are two significant benefits to taking part in a funding round for a startup when you’re a startup.
Firstly, the money you receive. When you agree to work with an investor, whether they are an angel investor, VC, or private equity firm, they give you capital in exchange for equity. By equity, we mean a share of your business. The amount of money you can expect depends on which type of funding round you go for.
Secondly, you’ll get skills, knowledge, and experience. When an investor puts money into your startup, they’ll put the effort in to make sure you succeed. They’ll give you advice, sit on your board, and introduce you to people in their network.
The different types of funding rounds for startups
There are several different types of funding rounds available. Typically you start at the bottom and work your way up as your startup grows and needs more money.
However, you don’t have to fundraise at each stage. It might be that you have a small local business and are happy to stay at the seed funding level. You might successfully complete Series B funding and decide to exit the company. You might go the whole way through the process and launch your business on the stock market.
No two journeys are the same.
We’ve put an estimation of what you can raise at each stage, but just take this as a rough guide. The money you can get depends on the industry you’re in, the product or service you have, and how much the investor likes your business.
The one where you fund your startup yourself is ideal for raising: between $10k and $100k
Pre-seed funding is the stage before you consider investment when you’re using your own savings to move the business forward.
You’re likely testing the waters with your startup at this point, developing your ideas, and carrying out testing to make sure your product or service is viable.
Nearly one in three businesses fail because they ran out of money during the Pre-seed funding stage. This means if you want to take part in Seed funding, you need to plan ahead and know what you want.
The one where you find yourself an angel
Ideal for raising: between $100k and $2 million
After the Pre-seed funding stage comes Seed funding. This is when startups attempt to attract angel investors to fund their business ideas.
An angel investor is typically an entrepreneur who has made money in a specific industry and wants to share their capital and experience with other businesses. While the amount of money available may be small compared to later rounds of funding, it can help startups refine their business idea and branch out to new markets.
You may also find some micro VCs willing to support your business at this stage.
The pre-A funding round for the startup
The one which you might not necessarily need
Not all startups need Pre-A funding.
It’s typically reserved for businesses that aren’t quite ready for Series A funding just yet and need an extra boost before they work alongside VC companies.
Series A funding
The one where you say hello to venture capital funding
Ideal for raising: between $3 million and $10 million
At this stage, you’re moving away from angel investment and reaching out to VCs – venture capitalists. VC companies specialize in providing funding to well-established startups. At this stage, you can expect to raise millions in investment that will help develop your business and team.
However, Series A funding is a lot more challenging than Seed funding. In fact, it’s estimated that 93% of companies that get Seed funding don’t get Series A funding, whether they choose not to or try but fail.
Series B funding round for the startup
The one where you hit the gas and take your business to the next level
Ideal for raising: between $10 million and $100 million
Series B funding is the next step up from Series A funding.
Still provided by VCs, this level of funding is for businesses that want to scale up and increase their market share.
Series B funding is often seen as the most demanding level of funding. This is because there is a lot of money on offer, and startups are scrutinized closely to ensure they’re worth the investment.
Series C funding
The one where investors are falling over themselves to invest in you
Ideal for raising: over $100 million
Series C funding is predominately offered by VCs, although you may find some private equity firms providing support at this stage too.
You’re still continuing to scale your startup at this point and are bringing in a healthy profit. With series C funding, you’re typically looking to expand your base of operations, perhaps opening stores or factories in another country or launching a new line of products.
Series D funding round for a startup
The one where you might need a little extra help
Ideal for raising: extra money if you need it
It may be the case that Series C funding is enough for your business. Typically Series D funding is only requested in an extraordinary situation, for example, if you want to merge with a similar company before considering IPO funding.
Alternatively, if Series C funding wasn’t enough for you to hit your goals, Series D funding can give you the boost you need to stay in business.
(Note: There are other types of funding rounds for startups available after Series D funding – E, F, and G. However, these funding routes are generally only invoked if the business is struggling and needs extra money to stay afloat. You want to avoid them if you can.)
Initial Public Offering (IPO)
The one where you go public
Ideal for raising: the sky’s the limit!
The final stage of the fundraising journey, this is when a business generates money by selling shares to the public. In effect, you’re launching on the stock exchange and going from a private company to a public one.
However, it can be a great way of raising a lot of money. In 2021, 122 companies listed on the London Stock Exchange collectively raised nearly £17 billion!
What if I don’t want to take part in funding rounds for startups?
After reading this, you may think that startup funding isn’t for you. That’s okay; some types of funding rounds aren’t suitable for everyone.
Apart from bootstrapping your business idea or borrowing money from friends and family, here are some alternatives that might be of interest:
- Create a crowdfunding campaign. This is when you create a campaign on a website like Kickstarter and encourage people to donate money in exchange for perks;
- Take part in an accelerator. Ideal for new startups, accelerator programs like YCombinator and 500 Startupsteach your critical business skills and introduce you to valuable contacts in exchange for equity. Many accelerator programs will give you financing as part of the package;
- Take part in an incubator. An incubator lets startups develop their ideas. While an incubator program typically doesn’t offer capital, it does provide services like an office, equipment, networking, and marketing in exchange for equity, which can be ideal for cash-strapped founders. Some government and business organizations run incubators without asking for equity
- Apply for a grant. Depending on your industry and the country you operate in, you may be eligible for a grant from your local or national government. This may be free of charge or something that you have to pay back over time
- Take out a bank loan. You may be able to apply for a loan from your bank or building society. You’ll probably have to provide a very detailed business plan to show your startup idea is viable and won’t fail
Bear in mind though as your business grows, the amount of capital you need to stay afloat increases substantially. While you might be able to get away with these options in the earlier stages of your startup journey, some types of funding rounds may become a necessity later on.
If you need a little help going through your funding options, we can help you find some valuable opportunities.
In summary: funding rounds are as simple as (Series) A, B, and C!
Startup financing can be challenging, no matter whether you’re applying for Seed funding or Series C funding. You have to find investors, create and refine your pitch deck and send many, many, many emails.
However, get it right, and you’ll be rewarded handsomely for your efforts.
Here are some of our top fundraising tips:
- Don’t leave getting funding too late. It can take a while, especially in the later stages, and you don’t want to run out of money before you get that crucial investment
- Network as much as you can. Connecting with people, whether on social media or face-to-face, can help build your presence and make investors aware of you
- Don’t give up. Rejection is common when it comes to fundraising, especially in the later stages. Rather than focusing on one investor, try and have a couple in mind that you’d like to work with
- Know what you want from the investment. How much money do you need, and how much equity are you willing to give away? Do you want to work with someone who has experience and contacts in your niche? You don’t want to walk into an offer that isn’t right for you
- Make sure you get on well with your primary investor, especially if they will be sitting on your board. Many startups have had to turn down a lucrative offer just because they clashed with the investor
If you’re considering participating in some of the types of funding round, we wish you luck. And remember, if you need additional assistance, don’t forget we’re here to help you.
Need extra support with funding? We can help.
We’ve been working with startups since 2014, helping them get the funding they need to grow their business. Whether you’re looking to get seed funding or Series A funding, we’ll give you the support you need.
Contact our team of funding specialists today and see how we can take your business to the next level.