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How funding a business works

Start-ups can reach their goals more quickly and effectively when they have sufficient funding. If you are planning to, or currently have a start-up, it is best to become familiar with the stages of obtaining funds.

But first the lingo, Funding rounds are the number of times a startup goes back to the market to raise more capital to advance their company to the next level or stage. The key participants in funding rounds are those looking to raise money for their businesses and potential investors who put money into a company because they believe it will thrive and want to get something in return.

A company advances towards funding rounds as it develops and grows, often starting with a seed round and going on to funding rounds A, B, and C. Whether you are a startup or a veteran looking to expand, these are the following funding stages to go through:

1. Pre-Seed Funding

Funds from friends and relatives make up the majority of the first round. It is the stage where the idea is put to the test and additional research is done to determine its viability. Angel investors may also invest at this stage if investors or their ideas are deemed attractive, however the founders should ideally make the investment.

Answer the following questions during the pre-seed stage:

  • Is your plan practical?

  • Has your concept already been done before?

  • How much will this venture cost?

  • Which business model will you deploy?

  • How are you going to start?

2. Seed Funding

At this point, funding may come from incubators, targeted capital, or even angel investors. This stage is riskier because the idea is beginning to take shape, and fewer firms succeed at this point. The funds are typically used for:

  • product development

  • product launch

  • product promotion

  • product-market fit testing

  • employing key personnel

  • additional research

3. Series A Funding

When evaluating an investment at this level, investors frequently look at the startup's performance with prior investments, or statistical data. They need to be persuaded that the startup would prosper from extra capital and grow to greater heights. Investors may not necessarily focus on profits when examining the data; instead, they may consider the potential it holds and the metrics it has managed to advance.

A company may start to position itself for future growth. The following is included in this:

  • business optimisation

  • compensating for financial gaps or losses

  • developing product or service further

  • constructing a scalable growth plan

4. Series B Funding

Startups in the Series B round aim to increase the level of success achieved in the earlier fundraising rounds. Despite the fact that the firm may not yet be profitable, it should be able to demonstrate that its business plan is viable and evolving. To advance from this stage to enterprise levels, companies must carefully choose their backers.

At this stage, investors can assist a company:

  • utilise cutting-edge marketing strategies

  • boost market share

  • create operational teams for things like marketing and business development

  • expand teams geographically into new areas

  • prepare for acquisitions

  • capital deployment

5. Series C or more

At this point, it's likely that funds will be needed for any potential strategic acquisitions. This could be done for a variety of reasons, such as luring the best talent, removing rivals, or combining many enterprises in preparation for a purchase.

At this stage, money is used for the following things:

  • building new products

  • boosting user growth

  • expanding geographic or market reach

  • purchasing struggling startups in the same sector

6. Mezzanine funding and bridge loans

These loans are intended for reasonably established companies with at least $100 million in revenue. While bridge loans are used for short-term funding, mezzanine loans combine debt and equity for lenders. They close the financial gap between this phase and the IPO. The money could be used to buy out the management at another business or to purchase a rival. Loans are often repaid with IPO proceeds over a six to twelve-month period.

7. Initial Public Offering

The golden stage of startup or any business success is an IPO. It takes place when shares of the company are first made available for purchase by the general public. The IPO is utilised to raise money for additional expansion or to enable company owners to sell their remaining shares for personal gain.

Fempire Finance

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