FUNDING
The Stages of Start-up Funding
The funding and development stages of a start-up vary significantly depending on the source
of information used. However, while there is some overlap in the descriptors, it should be
noted that this is appropriate. Each company is different, and various parts of these
companies may be at different start-up funding rounds. The levels/stages of the funding life
cycle are:
Concept Stage
The initial stage is the Concept Stage, the stage at which the entrepreneur begins to develop
the idea in their mind. Essentially, this process is broken up into five basic steps: Ideation,
Competition, Organization, Branding & Marketing, and Pitching. Once you have a basic
concept, the focus is on determining whether it solves a meaningful problem and whether
anyone would theoretically be interested in the solution. Your idea should reduce someone
else’s pain or give them a of concrete benefit or improvement over the existing situation.
You will also need to determine how you will build the product or deliver the service and
identify the target customers, partners, distributors, and competitors in your market. Along
the way you must develop and refine the product. The more data you collect, the better your
analysis. The more refined your idea, the greater the likelihood of success. You must validate
the market and potential demand for your product, particularly whether they will pay for the
solution.
Seed Stage
Following the concept stage is the Seed Stage. It’s at this stage that the concept begins the
process of being vetted and if appropriate, validated. Friends and family investment is typical
at this stage.
During this early stage, entrepreneurs approach investors including friends, family, and angel
investors to find financial support for their concept or product. These investors typically
initiate a high-level investigation of the technical, market and economic feasibility of the
opportunity. If the concept appears feasible, the investor may support the entrepreneur with
time and financial resources. Once this occurs, entrepreneurs take the first steps in forming
the company and developing the concept.
Early Stage
The Early Stage, following the initial validation by third parties in the seed stage comes
next. Development of the product, infrastructure and team proceed and late in this stage, the
company begins its growth effort. Angels invest heavily at the later points of this stage.
In the early stage, aspects of the company remain incomplete, although there is usually
evidence of progress in the company’s development. Typically, the management team is
incomplete, the product or service is still in development, or if developed is in the testing
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stage and has not yet gone to market on a commercialized basis. If the product is
commercially available, it is generating revenue on a very limited basis. The company has filed
for but not received any patents for the proprietary technology and their product and
websites are usually identified as being “beta” versions. It is in the early stage that
entrepreneurs typically begin seeking funding from accelerators, angels and Venture
Capitalists (VCs) as their previous funding is typically provided by the founders, friends, and
family, individual angels and occasionally accelerators. Early stage companies seeking
financing are typically only a couple of years old.
Growth Stage
During this stage, the company endeavours to grow sales. It is usually financed by follow-up
financing from angel groups, super angels, larger angel groups, angel syndicates and as such
this growth which began late in the Early Stage extends into the Mezzanine stage.
Here the management team is complete and the product or service has gone to market on a
commercialized basis. Enough revenues are being generated and the company is beginning
to obtain market validation for their product. Patents filed for proprietary technology have
been or are close to being issued and their product and websites are offered on a commercial
basis. It is late in the early stage that this growth stage begins and the entrepreneurs typically
seek larger higher funding from angels groups and VCs. At growth stage, companies are
typically only two to four years old.
Mezzanine Financing Stage
Expansion continues in the Mezzanine Financing Stage as the venture attempts to scale its
sales. The venture is typically financed in this stage by Venture Capitalists. Depending on the
development of the company the Mezzanine financing may, like the exit stage be considered
a bridge round. Mezzanine financing is typically known as bridge financing because it finances
the growth of expanding companies prior to an IPO.
The growth stage of a new venture that is late in the “Early Stage” continues into expansion
stages that typically require mezzanine or bridge funding. This form of funding is made up of
convertible debt or preferred shares, which are more costly and provide investors certain
rights over the holders of common equity.
Companies in the later stages of development generally have fully vetted business models,
put in place a broad, multi-functional team, commercialized their product, and achieved
reasonable sales momentum. The next step forward is to find additional financing to scale the
company. The objective of the mezzanine funding is to add the fuel necessary to significantly
accelerate the growth curve of the company.
Exit Stage
The last of the startup funding rounds is the Exit Stage, which requires a bridge round from
VCs and culminates in an IPO or sale to a strategic player.
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RAISING CAPITAL
To determine how much you will need to finance your business and what sources will be the
most promising, depends on three important things:
• What stage your business is in now (start-up or growth).
• The purpose and amount of funding you need.
• How much capital you already have (personal and company equity).
If you are in the earliest stages of starting a business, you need to know how much money
you already have from personal reserves and its purpose before heading to an outside source.
The difference between the two determines how much additional capital you need to obtain.
Consider when you might need the money too. Are there alternatives like renting a piece of
expensive equipment for a time, or hiring someone to work part time until you can afford to
bring them on full time? Remember it takes a lot of creativity to start and run a successful
business. Below are some of the sources.
1. Bootstrapping
The most common way that entrepreneurs raise capital to fund their business ventures is by
bootstrapping their way to success. Bootstrapping means relying on your own savings and
revenues to operate and expand.
Some ways to bootstrap include tapping into personal savings, getting all your friends to pay
you the money they owe you, borrowing funds from a retirement savings plan, selling things
of value, and putting some expenses on low interest credit cards. Or you could use a similar
idea as above and start a service that compliments your business and start charging for it
while you build a client list.
2. Family and Friends
This is a traditional way of raising capital for a business, but it’s still effective if you have a
support system around you that believes in you. Many young people are forgoing college and
instead using their would-be college savings to start a business. For those who know they are
destined to become entrepreneurs, there can be no doubt this is the right path to take.
Friends and family can be great sources of not only start-up capital, but also long-term capital.
While it can be good to moonlight a couple of business courses in your spare time, your family
can be there for you when you need a little extra push in the right direction.
3. Non-cash Bartering
Another way of increasing your capital is to barter for some of the things that you need. This
increases your ability to operate and grow your business, freeing up available funds for things
you must pay for. Let’s say you are a marketing firm trying to fund the costs of a new CRM,
but it’s cost prohibitive at this time. You meet a colleague who is in serious need of content
marketing, but also doesn’t have the budget. However, he does have access to a sweet CRM
that he is willing to let you set up with an administrator account on, in exchange for some
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help in the marketing department. No cash is ever exchanged but set up a simple written
agreement and go from there.
Other types of bartering can include equipment trades, office shares in exchange for
answering the phones on certain days, and even borrowing a vehicle in trade for some
delicious cupcakes your shop makes. Seek out trustworthy entrepreneurs and ask if they are
open to bartering.
4. Partner
A similar arrangement and way to increase capital is to accept support from a partner.
Combining resources and funds can help more than one business to thrive.
Entrepreneurial partnerships are popular and can work out fantastically as long as both
parties know what they are getting into, agree to the terms, and put in their fair share of the
work. There can be various types of partnerships too, which makes them adaptable. Some
partners prefer to stay on as an advisor in the background. Others take a more active role and
share their ideas about the business direction.
5. Grants
A more traditional way of raising business capital is to seek out funding through a variety of
grant and loan sources. There are many grant programs for disadvantaged and minority
business owners, as well as free programs to train you on how to start and grow a business.
Most of these are funded by the government.
6. Loan
One of the best ways to obtain a business loan is by asking at the bank or credit union you
already do business with. Check out rates online and then apply for loans with the lowest
interest rates and easiest repayment terms. Always remember to shop around and do your
due diligence before agreeing to anything.
7. Investors:
There are two types of investors you may be interested in approaching as an entrepreneur.
An Angel Investor has a boatload of cash but wants to remain silent in exchange for partial
ownership of the business. You still have the say over what happens, but you must generate
healthy revenues or risk losing this investor’s support. Have a solid pitch and a business plan
ready to present.
The other type of investor is a Venture Capitalist who normally seeks out established
businesses that have a track record of growth and projections to continue this growth.
Business owners present their ideas and financial estimates to potential Venture Capitalists
and then hope they get the best offer.
8. Corporate Sponsorship
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Whether you have a day job now and this business idea is just an idea, or if you have already
launched it -- it is time to get visible to corporations out there. To do this, you must develop
a strong professional brand. One of the most effective ways to do this is to market yourself
to the masses. Make use of channels like YouTube, Facebook, Instagram, etc., to develop your
brand persona. An example of this is an entrepreneur who started out doing makeup reviews
and tutorials, with time, he/she will be known.
Consider what you have to offer in terms of uniqueness of your ideas, approaches to things,
and what you are hoping to achieve. Market your business and yourself well. Use a blog
platform combined with social networks and tap into video marketing to make yourself more
present to others. You can easily land affiliates and corporate sponsors willing to pay big
money just to have you mention their products and services or run small ads on your blog.
Business Accelerators
A business accelerator is a program designed to help established startups scale quickly, and
often provide funding in exchange for equity in the business.
Accelerators often require startups to already have a minimum viable product or a fixed team
before they can apply. Once admitted, startups go through an intense period of growth and
development, often over the course of three to six months.
During this time, startups receive mentorship and resources from experienced entrepreneurs,
investors, and business leaders. Startup accelerators typically culminate in a Demo Day,
where startups pitch their businesses to a room full of potential investors.
Assignment: Differentiate between business accelerators and incubators
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Starting a business begins with an idea. It must focus on solving a problem in the market. At
the concept stage, you have an idea and are exploring the feasibility of building a product or
service based on that idea. Essentially, this process is broken up into five basic steps: Ideation,
Competition, Organization, Branding & Marketing, and Pitching.
Once you have a basic concept, the focus is on determining whether it solves a meaningful
problem and whether anyone would theoretically be interested in the solution. Your idea
should reduce someone else’s pain or give them a of concrete benefit or improvement over
the existing situation.
You will also need to determine how you will build the product or deliver the service and
identify the target customers, partners, distributors and competitors in your market. Along
the way you must develop and refine the product. The more data you collect, the better your
analysis. The more refined your idea, the greater the likelihood of success. You must validate
the market and potential demand for your product, particularly whether they will pay for the
solution.
Organizing a business can be a complex journey. Developing and filing the appropriate
documents will create the foundation for a successful business.
As entrepreneurs begin to establish their companies, they will find they need to register and
file with the appropriate state and federal governments. However, some don’t consider the
importance of initial branding & marketing as part of this process. Following are seven items
entrepreneurs should address as they conduct their research on the opportunity before them.
Potential investors utilize your pitch to assess the market opportunity, the management team
and expected efficiencies related to the use of potential investment funds. Remember that
should the group move to the next stage, they are committing significant time and resources
to a potential investment.
