While some startups are fortunate enough to need little to no outside funding, the majority of successful startups have raised funds from multiple external sources. There are different types of funding available to startups depending on consumer interest as well as industry. External funding is commonly received through various different rounds. These can include pre-seed funding and seed funding followed by series A, B, and C. Your startup can go through one, some, or none of these funding stages. The timing and manner of gaining investment rounds is critical to startup success!
Pre-seed vs. Seed Funding
The first two rounds of funding are pre-seed and seed funding. Both happen before the business is making revenue and give it the much-needed early boost. What’s the difference between the two? Let’s take a look at them.
The pre-seed round of funding is actually not a formal round at all. At this stage, founders are typically getting first operations setup around their idea. Most commonly this “round” is funded by the entrepreneur itself or family and close friends. Investors at this stage are probably not receiving equity in the business in exchange for their investment.
Seed funding is the first official stage of getting equity. Potential investors at this stage include the founder and their close family and friends like the pre-seed phase, but also includes external sources like accelerators, angel investors, venture capital companies among others.
Why is Seed Funding Important?
Seed funding gives entrepreneurs the boost and support they need to start pursuing their dreams before revenue starts rolling in. It can be used as working capital or a cash reserve. It can be used to cover costs of anything from market research, beginning development, and setting up initial marketing. It allows for easier and faster growth as well as padding for emergencies. The opportunity to attract strategic partners and allies is on the table as well with seed funding. Your risk in the venture as a founder is reduced with funding rounds.
Types of Seed Funding
Like we mentioned in the pre-seed versus seed section, dropping your own cash is a viable option to put towards funding! Bringing your own wealth and savings to the table is called bootstrapping. While this does put financial strain on an entrepreneur upfront, it does mean that they don’t need to repay someone or lose equity for that amount.
Incubators offer founders support as well as funding. Incubators may offer small seed investments, but generally do not take any equity from the startup. They can offer perks like educational workshops, use of equipment, networking opportunities, and even office space. Their whole goal is to create a community and foster up-and-coming startups.
There are incubators all across the US nurturing new startups. An incubator that is close to Codelation’s heart is the NDSU Startup Incubator located in the NDSU Research and Technology Park. Codelation’s main office is located in this building in Fargo, North Dakota. We love being in a space full of bright minds and friendly faces. There’s always something new and amazing being worked on.
Accelerators can be similar to Incubators by providing support, but they’re more focused on business scaling. They offer amazing resources like mentoring and networking opportunities on top of small seed investments. Accelerators are privately funded and most take equity in exchange for the help and investment. Techstars and Y Combinator are two popular examples of accelerators.
Hallelujah! No, these investors (and sometimes networks of investors) are not literal angels. They are investors that offer capital in return for debt or equity. They’re called angels because they offer investment when startups are in early stages, the time with most risk of failure.
Crowdfunding has become incredibly popular for people to get their great ideas off the ground. Crowdfunding sites open the door so anyone, anywhere can donate anything from a few dollars to thousands. Tile, Oculus, Exploding Kittens, Popsocket, and Brooklinen are just a few examples of businesses that got their seed funding on sites like GoFundMe, Indiegogo, and Kickstarter.
Debt funding is exactly what it sounds like, getting funding in exchange for personal debt. Loans from the bank or money borrowed from elsewhere falls under this category of funding. Occasionally investors like angel investors give loans instead of equity, creating personal debt.
Corporate Seed Funds
Big tech companies like Microsoft, Google, Apple, and Intel also back promising startups with seed funds. Getting an opportunity like this offers big publicity for your startup. If your startup gets chosen it often means that it shows promise to bring in profit for them or could even become one of their IPs.
A venture capitalist (or VC for short) is a private investor that provides capital to startups in exchange for equity. They’re oftentimes interested in funding startups with high growth potential. VCs typically will join multiple rounds of funding after the seed round if the startup continues to reach parameters and goals.
Choosing the Right Investor
While seeking early seed funding, a founder should try to be flexible with their expectations. A few notes to consider about investors are their funding capacity, industry influence, and experience in the sector you’re looking to thrive in. You may find that an investor offers less cash investment than you were hoping for, but has immense industry knowledge and experience that will benefit your growth immensely.
Another key thing to pay attention to is if an investor understands your idea and your vision of where you want it to go. On the same note, founders should also learn investors’ intentions, their goals, and style of working among other things. Having open discussions and meetings is a great way to put in the time to learn more about each other and see how you align. As with any situation where a lot of money is involved, take time to think, weigh your options, and consider benefits and downsides carefully before agreeing to signing with an investor.
Following Funding Stages
You may be wondering, what happens after your initial pre-seed and seed stages? Well, if you are having continued growth and success, you may have the opportunity to receive more funding from investors. Let’s take a peek at these following stages.
Series A is the first funding stage available after the seed stage. This stage is typically open to founders with businesses that have developed a track record based on key performance indicators. These KPIs may differ from startup to startup; user base numbers and consistent revenue numbers are examples that show your startup is more established and serious.
In this stage, investors are looking for founders with strong strategies to keep growing and making more money with their intriguing product. In order to impress, it’s important to have a business plan outlining how you’re going to make long-term profit.
The series B stage is commonly where a startup moves past the development stage. The previous stages have proven that the venture is well-established and prepared for continued success paired with a developed user base. Series B funding comes in to help startups respond to increased demands brought on by the growing user base.
Series B funding is often used for increased spending on areas like marketing, business development, talent acquisition, tech, and support. Bulking up your business is what the series B stage is all about.
Businesses seeking series C funding have proven themselves and become very successful. This round of funding is sought after to further build their dominance and expand on their success. It’s main goal is to scale the business as quickly and successfully as possible.
You may see series C funding used to develop new products and increase reach into new markets with different customers. Acquiring other companies is also a way some startups choose to use series c funding, further strengthening their success.