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“A third of small businesses start with less than $5,000. “
– Fundera
Just like the idiom goes, ‘not everything that glitters is gold’, the same can be said about a startup journey. While things seem lucrative and easy from far, they are anything but that once you own a startup or work closely with one.
Having a brilliant idea is one thing but getting the investment to make that vision into a reality is a whole different arena. It requires time, energy and lot of patience.
On books, a startup should start slow and with time raise enough money to sustain itself and its employees. In a few years, as the customer base of startup expands, the market value of startup should rise and enable the CEO(s) to expand the company and take on newer projects.
What might seem natural route on books is rarely a happening in the real world. While there are a small number of companies that grow according to the model described above, the majority have to look for different ways to raise enough fundings to sustain their operations.
Hence, the funding rounds.
What is a funding round?
There is a common misconception that a startup needs only one-time funding to operate and grow simultaneously. On the contrary, startups needs funds every now and then in the initial years to become matured.
Funding rounds provide both the investors and startups a common platform where both can be benefitted. When investors fund their favourite projects on one hand, entrepreneur(s) get to have necessary funding to make their dream into a product/service to offer to the world. It is a win-win situation for both parties.
When a startup/company goes back to the market to raise some capital, it called fund raising. Every time a startup does this, it is called as a ‘funding round’. Every funding round is clearly defined, which lets entrepreneurs reach their next milestone or business goal. Once they have achieved this, they might come back with a newer and bigger milestone to be achieved, thereof entering the next funding round.
“Only 0.05% of startups raise venture capital.”
– Fundera
How do funding rounds work?
Here are the steps that a funding round typically constitutes of. There might be exceptions in some extraordinary situations but typically, this is how funding rounds work for the entrepreneurs.
The steps are:
- Gathering necessary data about their project and how it works to answer any questions by the investors
- Doing a thorough research on the investors to evaluate if they have funded a project similar to theirs or are interested in similar projects or not
- Creating a pitch deck and presentation that shows convinces the investors that they are the next-big-thing
- Attend the investor meeting and pitch
- Make term sheets and offers for the investors
- Once they get the fundings, closing the round with wire transfers
- Finishing the necessary paperwork
‘Runway’ is defined as he time period between two funding rounds. Typically, entrepreneurs take a runway time of 12 months to come back for the next funding round but some entrepreneurs come back in merely 6 months.
The most important driving factor of getting funding is to have a strong story and vision. You need to absolutely believe in what you want to build/offer to convince the investors to give you their hard-earned money. Showcasing them the bigger picture and what the future holds for them and you needs to be the gist of the pitch and presentation.
The most important driving factor of getting funding is to have a strong story and vision. You need to absolutely believe in what you want to build/offer to convince the investors to give you their hard-earned money. Showcasing them the bigger picture and what the future holds for them and you needs to be the gist of the pitch and presentation.
Pre-Seed
Pre-seed, evident by its name, is the first stage of fundings for a startup. It is considered as an informal way of raising funds and only recently has become more prominent in the funding world. This round is also dubbed as ‘friends and family’ round. Often times, angel investors also participate in this round.
Seed Round
This round is when the real work starts for entrepreneurs. Any startup that aspires to raise some capital can benefit from this, given that they have done the required homework. Funding can come from a number of sources at this stage:
- Angel investors
These are usually successful entrepreneurs themselves who are looking for projects that interest them and can be taken to the next level. Any passionate entrepreneur with a promising startup might be able to bag investment funding from them.
- Accelerators & Incubators that offer from $10,000 to $100,000 as startup capital
Incubators that offer startup capital also have their terms and conditions. The majority of them ask startups to work in their premise and ask for regular reports to see the progress. They have a fixed time span till which they backup a startup.
Funds that are raised in this round are usually used to do more research, test the product to see if it’s a good contender for the market or not, to accelerate the product development or to hire more resources to work on the project.
There are many firms that have used this to raise funds and have been successful as a result, including 500 start-ups and SV Angel.