If you’re reading this, you’re probably thinking it’s time to begin transforming your business vision into a reality. Great choice! This is a really exciting time.
When pursuing investment, you don’t need to be overwhelmed by terms such as Pre-seed, Seed and Series A funding. In this article, we’ll give you an introduction to what these types of funding mean, and how they work so that you can approach the next stage of scaling your startup with confidence.
In total, there are 7 stages of funding:
Series D & E
Initial Public Offering (IPO)
Don’t worry. You don’t have to get your head around all these stages from the get-go. In fact, most startups never go on to surpass Seed funding.
Investments from Series C onwards deal with enormous amounts of capital sourced from Hedge Funds, Private Equity and Investment Banks. For now, let's leave the advanced rounds on the back-burner and focus on the here and now…
What is it?
Pre-seed funding is essentially the first opportunity you have to gather money when your startup idea is yet to materialise.
Where does it come from? This money is sourced internally, typically from generous family and friends who believe in your idea and vision.
How much can I raise? Typically, Pre-seed investments don’t exceed £150k.
Not sure whether your startup fits into this category? Here are a few common identifiers of a Pre-seed business:
You've yet to produce a tangible product, but you’re in the process of perfecting your blueprint. You may have laid down the skeleton of a prototype that shows some function.
You have identified a clear a gap in the market, and a plan to fill that gap with your product.
You’re thinking of recruiting a small team to help you advance with the production phase.
Your technological expenses are stacking up, as you’ve been experimenting with services.
The Pre-seed phase often feels like everything is up the air, making it one of the most difficult times for founders. Progressing towards Seed funding offers much more stability and facilitates your next stage of growth.
What is it? Seed funding occurs when external funds are first introduced into a startup in order to grow an existing operation. This round of funding is used to finance product development, perform market research, or grow a team of employees. Seed funders will expect a portion of equity in exchange for capital.
Where does it come from? Though friends and family can become Seed funders, it’s usually sourced from Angel Investors and High Net-Worth (HNW) individuals. Venture Capital (VC) funding is also possible at this stage.
How much can I raise? Seed investments tend to provide anything from £150k - £2m.
Unfortunately, you can’t steamroll through the rounds of funding. Patience whilst cultivating your business is vital. To stand a good chance of attaining Seed funding, you’ll need to have a few things in order:
You should have at least some revenue to show. Seed stage investors know that you might not be able to clarify a detailed profit and loss (P&L) statement, but you’ll probably need to provide some financial metrics.
You should approach Angels or HNW investors with a team. Not only does this indicate viability, but it also shows investors that other professionals have faith in your product.
Series A Funding
What is it? As businesses surpass Seed funding, the stakes are raised and competition heats up. In fact, most startups don’t attempt to make the transition.
That’s not to say Series A isn’t a desirable milestone. It just means that making that transition takes extreme perseverance and hard work. Series A funding is useful for optimising product and user base, and potentially scaling your product across different markets.
Again, investors distributing this level of capital will be receiving a company share and expecting a lucrative return on investment (ROI).
Where does it come from? VC firms which manage numerous investments in start-up and scale-up companies.
How much can I raise? Series A funding can generally offer up to the £15m mark.
To gain Series A funding, VC investors will be looking for:
A comprehensive business plan laying out the future 12-18 months.
An excellent pitch deck - a succinct presentation showcasing your product and why it’s important.
For SaaS companies, many Series A investors see annual recurring revenue (ARR) as their strongest determiner of whether you’re ready to raise. Generally, when a company passes $1 million in ARR they’re deemed ready for Series A.
A perfect match between VCs and startup team – certain VC firms tend to favour certain business models, regardless of sector. Look through different VC portfolios and make sure you approach a firm that favours your operation.
Hopefully, this overview can help you structure the course of your business venture. Take time to identify where you stand amongst these phases of growth, and who your investors are. From there, you can take the necessary steps towards readying your project for its next funding milestone.
Remember, the world’s biggest companies were once Pre-seed startups!
There’s no fast-track to progressing through these rounds, you’ll have to put the work in and elevate your business at each necessary step.
If you navigate through these rounds successfully, further investment awaits to scale and extend market share of your business, and then develop entirely new products.
Don’t put a limit on what you can achieve. Good luck!