Sweet are the coffee shop brainstorms, revelations in the middle of a hot shower, napkin diagrams, and late-night competitive research. This is the pure and innocent (mostly) phase of entrepreneurship, when anything is possible and you’re trying on thrift store jackets to look like a humble genius on the cover of Time Magazine. You’ve got your MBA (or not) and you’ve crunched and un-crunched and re-crunched numbers so many times that there’s no way in hell your product or service idea won’t work. Now all you need is a little money.
Actually, you need a LOT of money, and chances are neither Mom, Dad, Grandpa, or Aunt Sally have got the kind of cash flow it takes to get a startup off the ground. It’s time to hit every networking event you can find to mingle with investors and fall flat on your face when making your first couple pitches. For many of us, talking money feels like an ugly thing, but it doesn’t have to stay that way. The more you know about the expectations and aspirations of everyone involved within a given investment scenario, the more you can approach every opportunity as it is—a game with some unspoken rules that aren’t too hard to decipher and a lot of money at stake.
So, in that spirit, we’ve built out a general trajectory of what startups can expect from the moment they begin to seek out initial investments all the way to going global. For each phase, you’ll see the range of expected money-raising, the size and functionality of the company, and the types of investors interested.
This is when the Big Idea has become more than just some what if? talk over cocktails.
State of the company: The founder has a good idea of the product or service, but the integral specs might not be ironed out yet. Investment capital here can help to fund all of the necessary preliminary work that must be done in anticipation of a product launch:
- determining the company’s particular market niche
- identifying and building out the personas of target demographics
- conducting substantive competitive research
- product discovery methods
At this point in the startup lifecycle, a general business model and core team may already be worked out, but as funds are raised, development, sales, operations, marketing, and hiring processes can certainly be fine-tuned. More than likely, a startup at this point would be best served in entering an incubator and/or accelerator.
Investors: Here’s when all the risk lovers come running—angel investors and independent investors
Money raised: $500,000-2 million (could be a little more or a little less, depending on the company and its market). The money raised at this time is all about arming the company with enough funds to hit its first series of benchmarks as a company. After this round is over, the company will have launched a product and sustained considerable growth before hitting up investors again.
*In the past decade or so, the proliferation of early stage funds has given rise to the “seed extension” round, which can generally function in two ways:
- the amount of earned funding in the traditional seed round was less than the range stated above; now the founder would like to land a higher purse, but still below the Series A funding range
- the founder underestimated the company’s needs and, though the initial round of funding fell in the range above, but the company still needs a bridge to carry the company until it’s ready for Series A funding
The company has a good thing going, but it’s by no means fail-safe.
State of the company: A product or service has already been launched and is generating revenue, though profits are generally unlikely at this time. But that doesn’t mean that product optimization should’ve been halted. After maintaining initial growth, the company is now ready to refine its distribution and expand into new markets, new demographics, further increasing its brand visibility. Now’s the time to tweak the business model for long-term profit and sustainability.
Investors: There’s still a lot of risk lovers involved in this round, but a startup’s specific track record can draw in VC firms that are more apt to favor later-stage startups
Money raised: $2-10+ million (the hunt for the next unicorn can sometimes skyrocket the capital raised in this round). It’s time to use your funding to set big-time goals that will lift your company into a major market player.
If a startup makes it this far, it’s time to take off the training wheels.
State of the company: Production and advertising are in full-tilt. This round is all about scalability, so it’s time to hire more employees to support that scaling. Rather than simply cutting from revenue, major hiring pushes can be supported by this round of funding. As the business has already succeeded in a region or two, the mission now is to go global. Now’s the time to expand every aspect of the business.
Investors: VCs have a more concrete vision of where they’d like to fit into the company’s investor hierarchy. Specialty firms abound.
Money raised: $7-10 million. It’s time to build, build, and build some more.
In future installments, we’ll dedicate entire articles to each round of funding, and also provide a glossary for the different types of funding available for startups.
As southeastern NC’s premiere innovation and entrepreneurial center, tekMountain strives to connect the brightest minds with the means to realize their innovative dreams. Through our national investor and partnership networks, we spark synergy at every turn.
Contact tekMountain today if you’d like to learn more about how your company can ride the innovation wave from Wilmington, NC out into the world.
“How do we set valuation for a seed round?” http://venturehacks.com/articles/seed-valuation
“Why ‘seed extensions’ are becoming the new normal in fundraising”
“What size Series A round can you expect to raise?” http://www.nea.com/blog/what-size-series-a-round-can-you-expect-to-raise
“Startup Investment 101: Investment Rounds Explained” http://blog.onevest.com/blog/2015/4/23/startup-investment-101-investment-rounds-explained
“How Startup Funding Works” http://fundersandfounders.com/how-funding-works-splitting-equity/
“Series A, B, C Funding: What It All Means and How It Works” http://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp