You may have a winning team and product, but without funding — your startup may not take off. Seeking funding can be a complicated journey. We recently shared funding insider tips from local investors about what you need to do before, during, and after your meeting — including evaluating where your company is at. Now, after speaking with Atlanta-area venture capitalists, we dive deep into how startups can decide what funding they need.
Once you determine how your company is positioned for funding, you can research relevant investors in your area along with their reputation (very important). As you are researching, you may wonder, how do I know if our startup should seek seed-stage funding, Series A funding or late-stage funding from investors? Arriving at a meeting unprepared can make you miss out on important connections and worst of all — investment dollars.
Keep in mind that funding is geographically dependent. Series A, seed, etc. — they have different ranges and thresholds depending on your location and the number of investors. Hypepotamus breaks it down, so you find the right investors to meet your funding goals.
At the seed-stage of funding, your startup is a hatchling. It’s the first stage of venture capital funding. You have a great idea (AKA the seed) that may actually work and maybe one more employee, but you need funding to get started. The investor wants to see that you have a strong vision and understand the key risks on your approach. Ask yourself if you have a key understanding of the market and what’s your niche. Here’s where your vague hunch turns into a strong, viable idea.
Where does the money go? During this stage, funding usually goes to hiring a team, establishing customer acquisition strategies and depending on the product, releasing a beta. When you approach investors, make a list of attainable milestones to show your commitment to the idea along with any failures that you’ve been able to transverse along the way.
Startups at this stage are often only funded by family and friends and completely bootstrapped. Along with investors, seed-stage startups also seek mentors in their investors to gain more experience in their market and propel the company forward. Investors want to get in early, especially if the startup has a great chance of success.
Depending on immediate success, you may head to post-seed (need more to continue acquiring customers — Series A or B rounds also happen at this stage) or right onto late-stage funding.
Post-seed/Series A or First Institutional Round
The post-seed stage is the place where your idea/vision is already validated. Now, you can somewhat predictably spend those investable dollars. With an outcome being a predictable business model, established venture capital firms (or institutional money) become a good source of money for a Series A round.
The company continues to progress and if needed, a Series B may be raised for other stages of product and market evolution. Investors are there to fill a medium to long-term financial support.
Where does the money go? The money is being spent on people since at this point your product should be done and your idea validated. This is the time where you start building the foundations of the business, not the product, including building your marketing and sales team as well generating early revenue. If your startup is maybe not doing well, this round may allow for your startup pivot into a different business model.
Late-stage startups have started to see success in their product to a point that the revenue is growing at a healthy rate and the business is somewhat predictable. Your startup has established a good cash flow and it may or may not be profitable. As CEO, you understand who your customers are and how to retain them.
During this period, you may or may not need new investors, if you want to expand the company further. When researching investors, make sure you find out what’s their minimum revenue requirement. While some companies might be at $2M, others require $5M or more. If you don’t have any connections, reach out to your current investors for introductions.
Where does the money go? Startup expansion to other markets, new marketing strategies and improvements to the product. Those early seed investors may start asking for liquidity of their shares and ask to cash out. This may occur through acquisition or by IPO. At that time, employees and leadership may take advantage of their stock options as well. Look for the exit that works best for your startup and you.
It can also go to startup expansion to other markets, new marketing strategies and improvements to the product.
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