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How start Up funding works

How start Up funding works

‘Funding’ or ‘capital’ is required by entrepreneur to start and run a start-up business. It is a financial investment in a company for product development, working capital, manufacturing, capex, sales and marketing, office space, and inventory.

After the initial pre-seed and seeding round of funding, the funding rounds proceed from Series A to B, C and more. Each of the funding round can take time from three months to over a year, depending on the type of industry and investors, and the time between the rounds can also vary from six months to one year. Funds are offered by private equity investors, angel investors or venture capital firms, which mostly take an equity stake in that start-up in the form of a percentage.

Finally, the investors sell out their stakes usually through an IPO offer, or alternatively, the business can also use the IPO offer to raise more capital for expansion or capex purposes.

The various types of funding rounds are discussed below:

  1. Pre-seed funding: In this stage, the founders of the business or start-up themselves infuse capital in their start-up, and try to develop a prototype or proof-of-concept. The founders can also be helped by friends, family, an incubator, or an angel investor for raising capital at this stage.
  2. Seed Funding: The seed funding round is when investors, usually angel investors, private equity firms provide capital before a start-up becomes operational. Seed funding is used by the start-up to take it from ideation to the initial steps, such as product development or market research. Seed funding investments can vary from USD 10,000 to USD 2 million. At this stage, the start-up does a self-check, so as to ensure that it has gained some traction or not, if the answer is No, then the start-up usually folds. The start-up can also access and check the level of capital with them is enough or not, if they have enough capital then they will not go for fund raising from this point.
  3. Series Funding: After the initial seed funding, and accessing that they have traction, the start-up moves to the next stage of funding i.e. series funding.

In a Series A funding round, start-ups are expected to have a plan for an actual business model that will result in revenue and profits in near future. Series A funding usually comes from venture capital and private equity firms, although angel investors may also pitch in. Series A funding is also the stage where almost 50% of start-ups fail, which means no further funding for them.

The Series B funding is needed by a start-up when they have already found a product or service mix and are looking to expand their revenue and profits. As a result, they need more manpower and more capital to expand their operations. Series B funding mostly comes from the same investors who invested in the start-up previously. Also, some venture capital firms who invest in the late stage start-ups may also be interested to invest at this stage.

The Series C funding is required by the start-ups who are doing well in their home country and want to expand their business to international markets, acquire new businesses, and develop new products and services. The venture capital firms, private equity firms, banks, hedge funds that invest in late-stage start-ups, provide the funding at this stage.

The Series D and E funding is required by the companies to raise their valuation before going public with an IPO offer. A little more help just before going public may result in huge capital via increased share prices due to an increase in valuation of that firm.

  1. IPO: An IPO offering is often the last stage of funding that the start-up will require. An IPO is sometimes seen as a risky investment as the shares of the company may be undervalued or overvalued due to a number of unforeseen economic and company specific factors. But, if the IPO goes well and the shares are oversubscribed during the book building process, that means that the value of shares will increase even more in future which is a good news for both subscribers and the company.

 

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