There’s a lot that goes into cultivating a great business idea and transforming it into a thriving business. There’s hard work. There’s patience. There’s persistence. There’s creativity. And there’s funding. Getting a new business off the ground isn’t just a labor of love, it’s an investment.
Entrepreneurs looking to start the process may encounter a variety of different terms and options when it comes to financing their fledgling business. It’s important to understand the nuances of those terms.
Pre-Seed Funding
As the prefix suggests, pre-seed funding occurs before the business has formed. At this point, the business is in the conceptual stage. Pre-seed funding may support the development of a prototype or proof of concept. The dollar amount at this stage is comparatively low when compared to other rounds of financing. It usually comes from the entrepreneur’s personal savings directly or from family and friends who to support the future owner. In fact, you may also see this stage referred to as the “friends and family” round of funding.
Seed Funding
Although friends and family may also opt to invest at this point in the startup lifecycle, seed funding occurs when professional investors step in. Also known as “angel investors,” they may include incubators, venture capitalists, and other professional investors willing to take on riskier ventures. Funding raised at this stage will help the entrepreneur move her business from concept to ground floor. This money may be used for things like market research and product development. It may also enable the young business to hire staff that will help execute these tasks.
Series A Funding
If a business has established a minimum viable product (MVP), exhibited the presence of an established market or client base, and other key performance indicators, it may opt to pursue Series A funding. The company is no longer fully in the concept phase. This is a stellar idea with legs under it. Now is the time for revenue growth, and this stage of funding is going to help a business achieve it.
This is a big step for young businesses. In fact, less than 10% of startups move from the seed stage to Series A, according to Venture Beat. Entrepreneurs will need to be able to share a business plan that supports long-term growth when engaging investors. Funding during this stage is often used for preliminary branding and marketing efforts, as well as some early-stage operations and product development.
Series B Funding
With a team in place, the product developed, and market viability established, the business is ready to move past the development stage to the next level. Companies reaching this stage are well established and have proven that they prepared to grow successfully. Stage B funding can offer the cash flow necessary to propel the business. Funding may help expand operations, including hiring key staff to support marketing, business development, and customer service. It could also be used to help increase the company’s reach to different market segments and scale the business.
Series C Funding
When leadership teams start to consider a large expansion to new (potentially international) markets, the addition of new products, or even an acquisition, it’s time to look into Series C funding. Companies preparing for an IPO may also seek Series C funding to help bolster their valuation ahead of going public. If your company is at this stage, you’ve built a successful entity with a track record of performing well in its space.
Valuation is Key
At each stage of investment, your firm’s valuation will influence whether investors deem your business a high-risk or low-risk proposition. It’s crucial to have a clear understanding of the value of your company before you seek funding. Working with a consultancy like Peek Advisory Group can help business owners understand their company’s valuation and identify funding options.
We offer several types of business valuation depending on your goals. You can also get insights into the key areas noted above by completing a free online assessment. In five minutes or less, answer 15 questions and receive a 10+ page report on the areas in which your business excels and where it could use some work. Go here to start the quiz!