As an entrepreneur, one of the most critical aspects of starting and growing a business is securing funding. Funding rounds refer to the phases through which businesses attract investments. Each round of funding plays a unique role in the evolution of a startup, from the ideation phase to initial public offering (IPO), and eventually, becoming a mature company...
Funding rounds typically include pre-seed, seed, series A, series B, expansion capital (series C and beyond), mezzanine, and finally, the IPO. In the article below, written by the team at Déjà Partners, we provide a high-level exploration of these funding rounds, the typical characteristics of businesses at each stage, and various business models that entrepreneurs utilise.
Pre-seed funding is the earliest stage of funding. At this point, the startup is usually at the ideation or conceptual stage. The company may be a mere idea in the minds of the founders, and the primary objective is to transform the idea into a viable business proposition. Pre-seed funding typically comes from the founders themselves, friends, family, or angel investors.
Businesses seeking pre-seed funding often lack a working model or minimum viable product (MVP). Instead, they have a concept, a vision of what they want to build. Investors at this stage are investing more in the people and the idea than a proven concept.
The seed funding round follows the pre-seed round and is intended to support market research and product development. At this stage, startups are expected to have an MVP or prototype. The goal is to refine the product or service based on market feedback.
Investments during seed funding often come from state agencies, angel investors and early-stage venture capital firms. Businesses seeking seed funding are typically pre-revenue but have a clearer vision of the market they’re targeting. They may not yet have proven product-market fit, but they should be actively working towards it.
Series A Funding
Series A funding is designed to optimise the business model and user base. At this stage, companies likely have a solid customer base and consistent revenue figures. However, they might not yet be profitable.
Venture capital firms, particularly those with a focus on early-stage investments, are the most common participants in Series A rounds. Startups seeking Series A funding are expected to demonstrate potential for high returns on investment and a well-defined plan for utilising the funds to achieve growth.
Series B Funding
Series B funding is about taking businesses to the next level, past the development stage. Companies at this stage are expected to have achieved certain key milestones, including proving their product-market fit, developing a strong customer base, and demonstrating consistent revenue growth.
Investors participating in this round will typically include a mix of venture capitalists and private equity firms. Businesses at this stage are expected to use the funding to scale operations, grow the team, and possibly expand into new markets.
Expansion Capital (Series C and Beyond)
Expansion capital typically involves later stages of funding, from Series C onwards. Companies at this stage are usually profitable or close to profitability and are looking to scale rapidly, enter new markets, or diversify their product offerings.
Late-stage venture capital firms, private equity firms, hedge funds, and even investment banks may participate in these rounds. They expect the businesses to have a clear strategy for scaling and a strong market position.
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is usually used by companies that are cash-flow positive and are planning for a buyout, merger, or IPO in the near future.
Initial Public Offering (IPO)
An IPO is the process by which a private company becomes a public company by issuing shares to the public for the first time. It is a way to raise a large amount of capital and provide liquidity for early investors and founders.
Companies at this stage are typically well-established, with a strong market presence, consistent profitability, and a sizeable employee base. The process is highly regulated and requires the companies to disclose detailed business and financial information.
Typical Business Models
At different stages, startups may rely on different business models to generate revenue.
Some common models include:
- Software as a Service (SaaS): Recurring revenue model, commonly used by tech companies. Customers pay a subscription fee for the use of a product or service.
- E-commerce: Selling physical or digital products online. This can be done directly, through a drop-shipping model, or via a third-party platform.
- Freemium: Offering basic services for free while charging for premium features. This model is common in digital products and services, like apps and games.
- Marketplace: A platform that connects buyers and sellers, earning a commission from each transaction. Examples include Amazon and Airbnb.
Securing funding is a critical component of business growth. From pre-seed to IPO, each funding round serves a specific purpose, supporting the startup through different stages of development. The expectations from businesses also evolve with each round, with initial stages focusing on conceptualisation and market fit, while later stages aim at scaling and profitability. Different business models, tailored to the startup’s industry and stage, can be leveraged to generate revenue and attract investors. Navigating these funding rounds successfully is a testament to a company’s resilience, business acumen, and adaptability, all key factors that contribute to long-term success.
How We Help Entrepreneurs
Our mission at Déjà Partners is to empower and support the best entrepreneurs and early stage companies. We understand the challenges and risks involved in starting a new business from scratch and are dedicated to providing mentorship, guidance, and support to help you succeed. Our services are offered on a pro bono basis, meaning there’s no cost to you.
We begin by working closely with you to prepare for a successful fundraising with institutional investors or debt providers. Drawing on our wealth of experience in building businesses, we provide valuable insights and feedback to help you refine your business plan and pitch. With our guidance, you’ll be well-positioned to attract the right investors and secure the funding you need to bring your vision to life.
But our support doesn’t end there. We’re committed to helping you navigate the challenges of scaling your business to create value and achieve your goals over the long-term. As seasoned entrepreneurs ourselves, we understand the highs and lows of building a business and can provide valuable advice and support along the way. Our goal is to help you mitigate against the prospect of failure so that you can approach your business journey with growing confidence and optimism.
At Déjà Partners, we’re passionate about helping entrepreneurs turn their visions into successful businesses. Contact us today to learn more about how we can help you achieve your goals.