There are five main financing stages that startups go through on their fundraising journey.
First Stage: Friends and Family
This round is raised by people who know you personally. You use this capital to prove that your idea is viable and to build a minimum viable product (MVP). Even if you have access to more funds, you should only raise the necessary amount of money at this stage, because the value of your company initially is very low and you don’t want to give up more equity at this valuation than you have to.
Second Stage: Accelerators or Pre-Seed Round
This round is raised from accelerators and pre-seed investors, aka angel investors who focus on uber early stage investments. An accelerator is, essentially, a school for entrepreneurs. It is an important resource for startups that need an additional support system to build their product, prove product-market fit, and properly prepare for the next financing round. Accelerators, unfortunately, do not negotiate their terms, which are the investment amount and the percentage of equity they require to make that investment. If you go to a pre-seed investor, then you have the ability to negotiate. However, on the other hand, you also have to be more prepared than if you go to an accelerator and ready to incur upfront legal fees.
Third Stage: Seed Round
This round is raised from angel investors and early-stage venture capital (VC) funds. Minimum qualification requirements typically include having your minimal viable product (MVP) ready. It also helps greatly if you already have customers or user traction. You use seed capital in order to complete product development and, in some cases, to launch your product.
Fourth Stage: Series A, B, and C
This round is raised from venture capital (VC) funds. The letter of the series indicates the order in which the money is raised. Each subsequent round allows you to raise a larger amount of capital, but also comes with more stringent qualification requirements in terms of the minimum level of revenues, cash flows, number of customers, etc. You use the Series capital to scale your business.
Fifth Stage: Private Equity (PE)
This round is raised from private equity firms. The private equity round is for more mature companies and you use this capital to grow your company further. At this stage, we recommend that you consider debt as part of your capital structure and then ask for professional financial advice to help you structure each capital raise in a most cost and risk efficient way.
To learn more about fundraising strategy and startup financing vehicles, check out Course # 5.
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