How It Works: Startup Funding Stages Explained

How It Works: Startup Funding Stages Explained


There are many different strategies an entrepreneur can use to acquire funding for their startup business.

The funding is acquired through “rounds” – which start at the “bootstrap” stage, and goes onward through several different iterations until the entrepreneur finally takes his or her company public – selling shares on a stock exchange (such as Nasdaq or the NYSE).

Let’s talk about what types of funds are sought after in each round.

Bootstrap Round

When you first have the idea to found your own startup, you may visit family and friends and ask them to help get your new company off the ground through loans. They may contribute on a friendly basis, or you may make things official by writing out a contract for the loan. (And from the standpoint of remaining friends with your personal investors, it is best to lay out everything in a clearly-written contract that dictates your responsibilities to your friends/family/investors and vice versa so there can be no misunderstanding.)

Crowdfunding campaigns are also typically considered as initial round fund-raising, although many companies do use crowdfunding to help expand their business as well.

Seed Funding

Some experts consider bootstrapping to be just another form of seed funding, while others consider seed funding to be in its own category.

In our definition, bootstrap funding has allowed a business to get started and show its potential. Next comes the search for seed capital to really start the company on its way.

If rather than getting loans from family and friends (as in a bootstrap) you incorporated and actually sold shares in your new business to them, that means you started immediately in at the seed funding level.

Other contributors at the seed funding level would be angel investors (business people who specialize in investing in startups in exchange for equity), a substantial bank loan, or entering an incubator program that helps you take your company to the next level.

Investment Funding

Once the business has found its feet and wants to expand, it’s time for investment funding.

This is when we get into a “series” of rounds – Series A, B, C, D and so on.

Those are just arbitrary names.  The types of activity that goes on in each of those rounds varies depending on the experts you talk to, but the general progression of the fund-raising is the same.

First comes “Series A,” where you have a proven business and need funds in the neighborhood of $500,000 or so. This is usually the minimum that a venture capitalist would wish to invest. Typically, they invest funds in return for equity in the company. They expect to recoup those funds when the business is taken public – i.e. shares in the company are sold on a stock exchange – or when the business is sold.

Once the company has reached the appropriate point, a “Series B” round of funding can take place.

This consists of taking the company public, with an Initial Public Offering or IPO.

Shares in companies are divided into two types – common shares and preferred shares. Preferred shares, as you can tell from the name, are the most desirable and are what venture capitalists (VCs) would receive. Preferred shareowners are allowed to vote on the actions of the company, and if a company liquidates, preferred shareholders will receive any monies before common shareholders.

Series “C,” “D” and so on are just additional rounds of raising capital – by issuing more stock, right on up to the “exit” or selling of the company for a profit.

Funding Never Stops

Seeking for funding is a process that therefore never stops.

Whether a business regards itself as a startup, or feels it has moved on to being a growth or enterprise company, there will generally always be a need for and a benefit from funding.