Should You Match Your Funding Source to Your Growth Stage?

Posted by Deepshikha Shukla

Funding your business has probably been one of the biggest puzzle pieces you’ve had to solve while trying to grow, particularly since the stage of your company can often tell you which funds to seek. To boost your chances of getting the right funding source, consider where your company fits on its growth curve or market life cycle and match the funding to your business’ stage. Then set your funding strategy and expectations accordingly.

Here's why: Understanding the business stage of your startup will help you make more effective decisions on when or how to get funds. For instance, some venture capitalists look for the most mature companies, while angel investors deal with startups in the growing phase. Check out the major startup business stages that every startup passes through with the recommended types of funding for each stage.

Pre-Seed Funding for the Early Stage

If you’ve got a great idea, but no product or customers, you’re in the nascent stage of your business. The market of the potential product or service at this point is generally unknown and untested. This stage involves exploring the feasibility of building an idea into a product or service, market testing and developing a marketing and sales plan for the product launch.

In most cases, you’ll need to bootstrap at this point, meaning you’ll use personal funds or savings and credit cards to turn the idea into a business.

Seed Funding for the Product Development Stage

When your prototype works, you’ll need funds to build a market and real product. Seed funding is typically among the first rounds of investment that a startup will receive. At the product development stage, you can raise funds through angel investors, government grants, micro venture capitalists (VCs) and crowdfunding. This startup stage involves hiring people and building traction until revenue starts coming in.

A government program generally offers capital to a company without taking an equity stake in the company. You can use this money to develop and launch the final products and for the growth of the company.

Crowdfunding platforms are set up for individuals to pitch their business ideas to a community of investors or people willing to support them. You can use these firms to learn about the demand in the market and increase brand awareness with social sharing.

Series A Funding for Building Traction

When a startup is all set in terms of product development and a working business model, you can acquire potential venture capital investments as the business progresses. If your final product becomes successful, most angel investors will assume you’ve got a valid business model and opportunity. This startup stage often involves hiring a team, further development of products or services and preparing a scalable market plan.

In this round of financing, a startup can acquire funds through accelerators, super angel investors and venture capitalists.

Series B Funding for Scaling

The Series B funding round is all about taking the business to the next level, past the development stage with the help of investors like banks and VCs. At this stage, startups raise funds to scale up and increase market share so they can meet the various demands of their customers.

Businesses that are just starting can access funds provided by business incubators and accelerators. Business incubators nurture businesses while accelerators fast-track them. You can also raise funds for your business through product pre-sale before launching your products officially. Thus, you can build consumer trust in your brand and increase the demand for your product before its official launch.

Series C Funding for Reaching New Markets

Series C rounds and onward are for the more established stages of a company. At this stage, you can get investments through banks, private equity, merger or acquisition or going public with an initial public offering (IPO). A private equity firm invests in companies in exchange for equity. At this stage, startups search for more funding options to build new products, reach new markets and acquire other startups.

When your startup brings a new technological innovation that can attract a new market segment or you have already proven the market and achieved unicorn status, you can typically apply for Series C funding.

IPO for Stock Market Launch

IPO is the process of offering corporate shares to the general public, and many businesses think of this as the pinnacle of fundraising, but most companies don't stop there when bringing in new investments. As you move further up the growth curve, you can use a revolving line of credit, which can be asset-based or tied to monthly recurring revenue, depending on your type of business.

Asset-based loans can smooth out your accounts receivables, enabling you to fund a targeted ad campaign or make some other short-term investment to boost revenue. They're typically against your invoices, so they're good options for companies that provide software, business services, or products.

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