How Startup Funding Really Works

Beyond Formation Startup Funding Rounds

As a founder, you may feel that most of your time is spent asking for money, time you would rather spend working on your product or go-to-market (GTM) strategy. But that’s just how the startup world works. Founders who can see and understand the contingencies involved in startup funding rounds can maximize their fundraising time and more accurately forecast their financial prospects.

Here’s what you need to know about how to raise capital to launch your product and scale up fast.

Funding Stages

While there is no consensus on universally-accepted terms to describe stages and funding rounds, the following terminology is commonly used to discuss startup funding.

  • Pre-seed funding
  • Seed funding
  • Series A
  • Series B and beyond

Pre-seed funding

Pre-seed is the first stage of any new business — the exciting and stressful time when founders are researching the market, building a business plan, and determining whether their idea is truly feasible. 

Using the term “funding” for this stage is a bit of a misnomer; typically, any resources used are provided by the founder themselves or by close friends and family. That’s why this stage of startup funding rounds is also known as “bootstrapping.”

During the pre-seed stage, founders often keep their day jobs or even take a second job in order to cover startup expenses. Typically, founders and their friends and family might invest anywhere from a few thousand dollars to $15,000 to get the business going and ready for the next stage. 

Seed funding

This stage is when founders start raising money for real. Seed funding can range anywhere from $10,000 to $2 million. 

The startup capital raised during the seed stage goes toward product development, launch, and marketing. It also funds additional market research and potentially the first hires beyond the founding team. 

The goal of this stage of startup funding rounds is to raise enough money that you can successfully launch your product and gain some traction in a small market. This will convince venture capital firms and other experienced investors that you’ve got a solid structure and strategy and a desirable product, which means you’re ready to scale up. 

During the seed funding stage, founders might still rely on their own money or the generosity of friends and family. But they also look for angel investors who are willing to take on a riskier investment in exchange for equity and influence over the startup’s operations. 

Series A

Series A funding is the stage you hear most about in the media,  and it features heavily in startups’ origin stories. This is usually the first time that venture capital (VC) firms will consider investing, as you’ve already proven that people will buy your product.

During Series A, startups typically raise between $2 and $15 million. This funding goes toward further developing your product and expanding into larger markets. That’s why investors at this stage want a detailed business plan outlining your long-term plans for profit — in order to guarantee their return on investment (ROI). 

After a successful Series A, startups are looking to hire a larger team and invest more substantially in legal, human resources, financial, and IT expertise.

Series B and beyond

Some startups go no further than Series A; that funding is enough to get significant revenue streams going, meaning the company can grow without extra investment. 

But other startups need additional capital — usually from VC firms — to continue scaling and to meet growing demands from customers. Series B funding ranges from $15 to $60 million. Much of that capital goes toward more new hires to fill specialized departments and teams. As the startup continues to meet consumer demand, it can grow horizontally into larger markets and outlive competitors. 

Next comes Series C, which is often used by companies looking to expand globally. The $60 million or more that startups raise in this phase goes toward purchasing competitors, developing more and better products, and even expanding into other industries. In this phase, VCs are joined by hedge funds, investment banks, and private equity firms, who’ve witnessed your previous success and are eager for a piece of the ROI that you’re generating for investors.  

Very few startups go beyond this stage of startup funding rounds into Series D or E, although there’s technically no limit to the number of fundraising rounds possible. 

Here are a few helpful articles that we looked at for startup funding inspiration when writing this blog:

Beyond Formation can help you raise money and maximize your valuation no matter what stage your startup is in. Our Blueprint is based on proven, real-world business and investment expertise.  

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