Financing rounds for a startup: what are they, when are they needed and how to start one

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If you are starting your activity as an entrepreneur in the world of startups, surely you have already heard about the dreaded financing rounds.

From our experience with our clients, we know that at first it is not easy to understand what they are, what types of financing rounds there are and how to find investors

For that reason, we have prepared this article where we are going to answer all these questions.

Let ‘s go.

What is a financing round?

A financing round is the process through which a startup raises capital to develop its activity thanks to the participation of investors

By putting part of their money in the company, investors become partners in the company and take control of a part of it.

Although there are other alternatives to obtain financing, this form of investment has become very popular in recent years due to the difficulty of obtaining bank financing and the complicated requirements of access to public aid for young entrepreneurs.

In particular, the figure of business angels has become crucial at this stage: people who provide capital to a startup in exchange for shares and who, in turn, contribute their business knowledge to help the company grow.

A startup will need different rounds of funding as it grows and depending on the phase it is in. 

Each of these phases is usually characterized by a different name and the amount of money required tends to increase in each round.

Below we explain each of these phases.

What types of financing rounds are there?

As we have just explained to you, each of the successive rounds of financing indicates the degree of maturity of the company and with it, the purpose of obtaining financial capital.

Since the birth of the company with the pre-seed and seed phases, the startup evolves towards series A, B, etc. Depending on the stage the startup is at, the type of investor that participates is usually different.

Pre-seed

In this initial phase, the entrepreneur has not yet fully defined his product or the business model and needs a minimum investment to give shape to the idea. This small amount of money usually comes from his/her own savings or from family, fools and friends.

On some occasions, the entrepreneur obtains financing in this phase from accelerators, incubators or even business angels, which contribute a part of the monetary capital in exchange for a participation in the capital stock of the company, which we know as “equity”.

In a pre-seed phase, it is usually raised around a maximum of € 100,000 with the aim of creating a minimum viable product (MVP).From that amount, the company will need to advance to the seed phase to see the viability of the product and its business model.

Seed

Once the startup has defined its MVP and its business model, it needs financing to launch its product on the market.

In this phase, the project needs much more capital to define the product and scale, so the startup usually seeks financing from more experienced business angels, crowdfunding platforms or specialized professional funds.

Once the startup manages to sell on a relatively stable or recurring basis, it needs a new injection of capital to continue growing.

 It is the turn of the Series A round, where the startup opens its capital to professional funds of a larger entity, with the aim of obtaining financing of between 300,000 and several million euros.

Series A

Upon reaching this phase, our startup has already begun to consolidate and needs to increase the number of consumers, either expanding its presence in new markets or expanding in the current one. 

If the startup has managed to get this far, this will be a key point in defining the future success or failure of the company.

Venture capital funds appear here, contributing much larger amounts of capital than previous investors in order to scale their sales as soon as possible to prevent the company from being overtaken by the competition. 

This capital is what we know as “growth capital”, and it can be between tens or hundreds of thousands to millions of euros per investor.

Due to these large capital contributions, old investors tend to see their participation diluted, since their shareholding percentage decreases with the entry of new investors as the existing capital increases. 

To avoid this dilution, it is common for former investors to buy new shares in successive capital increases in order to minimize their loss of control.

Series B, C, …

From this moment on, the company seeks new objectives through successive rounds of negotiation (B, C, D, etc.), with generally greater financing as a new round is executed. 

These objectives could be from the internationalization of the business to the development of new lines of the same, always seeking the final objective of the company’s IPO or its sale (exit).

Exit

Exit occurs when the startup is sold to a larger company in its sector (the most common option in Europe) or when it goes public (more common in the United States).

When a venture capital or business angel invests part of its capital in the startup, its objective is to help the growth of the company with the aim of recovering its initial investment in addition to a capital gain in the future, which is achieved when the “ exit “.

Although very few startups achieve the desired “exit”, the profit obtained by investors in these cases is very high, with very significant multiples of the invested capital, increasing the participation in the startup as soon as possible.

How to get a successful round of financing?

It is important that when you are looking for investors for your startup, you are able to analyze your project in depth and have a detailed business plan to justify the need for expansion and future profitability for these investors. 

In addition, contacts within the startup ecosystem are essential to access investors who will value your project the most and can add more value to the business.

Anyway we let you a really interesting post in wich they talk about Strategies for raising startup capital.

Although you should not be afraid to do it, it is important that you inform yourself well and get advice with the help of professionals.So if you are interested in raising a financing round and you don’t even know where to start, we invite you to contact The Startup CFO so that we can help you.

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