Startup funding concepts you should know about

A startup is a new and fast-growing company that relies on new technologies to scale and develop. This type of company aims to fill a gap in the market by conceiving and offering unique products, processes, and services.

Startups are growing as fast as technologies because today’s digitalized world has changed the vision and perception in all aspects of life, including, of course, how we do business or how we create a company. 

But, where did the term startup come from? This word is often related to the success of tech companies such as Apple, Amazon, and Google, which started as startups and grew enormously, evolving into the companies they are today. 

Related:  ​​Processes For Scaling A Successful Startup

Launching a startup requires time, effort, dedication, focus, and funding. Funding is one of the most challenging aspects of running a startup, therefore is crucial for CEOs and founders to be involved in this process and to understand the most common mechanisms for a startup to raise the capital it needs to establish itself and grow.

If you are going to fund a Startup, it is essential that you know and understand very well the funding concepts involved in the creation and growth of this type of business. 

Funding concepts you need to know:

Funding round

Through financing rounds, new partners can become attracted to acquire a part of the startup’s equity capital through the injection of capital that gives them cash flow and allows them to continue developing their action plans. This financing comes from investors such as business angels or venture capital firms.

Startups must go through several rounds of funding to prove that their idea deserves the money and that they will be able to achieve their objectives and overcome the challenges that come along the way. The idea is that with each round, startups raise enough capital to continue growing.

This type of financing can be used as a basis for diversification, consolidation in other countries, investment in technological development, hiring new team members, developing new products, or developing marketing strategies. Each round can be a boost to position the company above the competition.

Based on the raising purpose, startup funding rounds can be separated into different stages:

  • Pre-seed/seed.
  • Series A, B, & C.
  • And IPO.

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Loans

A loan is a form of debt assumed by an individual or an entity in which a lender, often a company, financial institution, or government, advances a specific amount of money. 

Loans are financial transactions where a specific amount of money is borrowed in exchange for an agreement on a set of terms and conditions regarding deadlines, interests, and more. 

Crowdfunding

A form of funding, usually online that follows the purpose of raising money through a large number of people where each contributes a relatively small amount.

Related: Camel Startups And Their Advantages In Times Of Crisis

Pre-seed Funding Stage

Pre-seed funding is when founders try to give their idea momentum when the company is in its early stage and often invests its own money. This frequently happens when the founders have a prototype or proof of concept for their startup.

Seed Funding Stage

In this phase, the founders attract so-called angel investors. These investors provide funds for the startup to continue researching, testing market needs, hiring a team, and starting production.

Series A Funding Stage

This stage focuses mainly on startups with a proven business model, a decent customer base, and who are already generating profit. The investments at this stage can start from $3 million and require a specific strategy to reach a higher return of inversion, so, at this point, startups have formulated a plan for their product or service.

Series B Funding Stage

Series B helps startups turn into enterprises. At this point, the company will probably have a higher valuation than in previous phases. Thus, the risk will be smaller as the company already has a track record, so the cost of the investment could be higher. This stage is all about scaling up the team and exploring new markets. 

Investors expect to see signs of growth at this stage in revenue, users, product, and service success.

Series C Funding Stage

At this phase, the companies are already successful, valued at $100+ million, and aim to receive equal funding. A Series C round is usually required when a company is ready for significant growth. At this stage, the company typically:

  • Has succeeded in its market
  • Wants to make acquisitions of competitors
  • Wants to increase market share
  • Needs to expand or develop new products or services

Equity financing

The practice of obtaining funds by selling shares is known as equity financing. A company that sells shares effectively sells ownership in its company in exchange for cash. 

Companies might seek this way of funding to raise cash because they may have a short-term requirement to pay bills or a long-term initiative that would enhance growth. 

Grants

A grant is a cash reward made by an organization to a person or a firm to support a goal or incentivize achievement. Since grants are gifts they don’t need to be paid back. 

Private Equity Firms

Private equity refers to investment partnerships that acquire and maintain businesses before selling them. These investment funds are managed by private equity companies on behalf of investors. 

Private equity funds may buy out private or public corporations in their entirety, or they may invest in such buyouts as part of a consortium. They often do not own shares in firms that are still publicly traded.

Incubator

An incubator is a business that fosters early-stage startups through several developmental stages until the companies have the financial, human, and physical resources to run on their own.

Startup Accelerator

Is a business program that provides education, coaching, and funding to early-stage, growth-oriented enterprises. Startups often participate in accelerators for a set length of time and as part of a cohort of startups.

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