The Alphabet – What every primary-school pupil knows by heart gets more complicated when startup-founders have to learn their funding-ABC. One of the most frequently asked questions when founding a startup and at the same time also one of the biggest challenges is “How do I finance my startup?”. Which financing option or which investor suits a new company is always very individual and depends on factors such as the respective company phase. Today we guide you through the most important phases.
The Funding ABC
The first stage of financing a new business is so early in the process that it is not typically counted as a round of financing. In this phase, the founding team is formed: People interested in founding a company join forces or look for colleagues in order to cover all the necessary competencies. This phase is referred to as “pre-seed” financing and typically describes the period when the founders are just getting their company off the ground. Meaning, the company is often not yet officially founded, or is often only founded with the money raised in the pre-seed phase. In most cases, the most common “pre-seed” funders are the founders themselves, as well as close friends, supporters and family.
This round of financing is usually used to implement the first prototype of an idea. But that’s exactly why it is one of the most difficult, because there is usually nothing tangible yet. This means that potential investors cannot properly assess whether the business model would actually work in reality. At this point, there is often “only” the business plan and a pitch deck with which you have to convince external financiers to invest in a great idea or a strong vision.
If external financing like from Business Angels does not work out at the first attempt and founders have to finance their seed phase themselves, then an interesting alternative is to participate in an accelerator program such as from German Accelerator or German Entrepreneurship. Here, startups get the opportunity to get to know the infrastructure better and to further expand their network.
The first major hurdle has already been overcome once the prototype has been produced. But to show that this model really works, a proof-of-concept must be generated. Once the financing of the start-up phase has been secured and proof of a functioning business model has been provided, new capital is usually required. This is then secured through the next financing round in the funding cycle – the Series A.
Proof of Concept
The proof of concept is very individual for each startup. It’s common to use this phase to create a prototype – so possible investors have proof that your idea will really work. It is not easy to define a proof of concept that fits every idea.
In general there are three basic possibilities:
- Creating a Prototype
- Testing the idea in a small project
- Market research
A little tip to round it all off: Gather as many opinions about your idea and expectations about your product/service as possible. Talk to everyone you tell about your idea, so you can save yourself some detours in advance.
After a company has established a stable business base, it may look for Series A financing to further optimize its product offering. In this round, it is important to have a plan for developing a business model that will generate long-term profits. In Series A financing, investors are not just looking for great ideas. Rather, they are looking for companies with great ideas as well as a strong strategy to turn that idea into a successful business.
Now is the time to have the perfect pitch deck ready. If you need some last tips and tricks, check out our Do’s and Dont’s for the perfect pitch deck!
Series C,D, E
Startups that make it to the Series C funding round are usually quite successful and want to use the money to develop new products or acquire new companies.
Series C funding is focused on scaling the company globally and on successfully growing as quickly as possible.
Often this is the last funding round, only a few companies aim for Series D or E before going public or thinking about an acquisition. Usually, the Series C financing round serves to prepare for the IPO or a company acquisition.
For almost every startup, the IPO (Initial Public Offering) is probably one of the highest goals that can be achieved when founding a company and means that shares of the company are offered at the stock exchange. The IPO usually follows a large financing round. Generally it is said that an IPO is aimed for about 10 years after the foundation.
Before one dares the course to the stock exchange, one should have informed oneself well about the conditions of the criteria, such as admission obligations, and on the other hand weigh up whether it is really already the correct time. An IPO brings with it a number of advantages, such as access to new capital or the publicity of the company. The startup receives a lot of media attention through an IPO and is thus offered a larger platform, which also makes it more attractive for employees.
Startups can of course also decide to finance themselves completely on their own, but it is often inevitable to fall back on investors in order to be able to grow quickly and, above all, sustainably. Mastering the funding alphabet is an art that every startup founder should understand sooner or later. It will help to evaluate your company and to understand what investors value in which phase and where the requirements are.
So now you know your A, B,C – easylike counting up to three – isn’t it?