Introduction

Ambitious founders of visionary products recognize that securing funding is a significant indicator of early success with the further development of their startups. Entrepreneurs face challenges in the stage of planning and project implementation as these initial steps require effective management of resources and talents engaged in the process. However, the mention of startup funding rounds might be confusing due to the concept’s complexity with associated terms, while most available articles contain an overabundance of text and examples, which can conceal the essential knowledge. Simplicity is a key to excellence, and this approach saves time and maximizes efficacy. Therefore, this article offers a concise manual to familiarize with the subject matter by defining series B funding, pre-seed, IPO, and other connected terminology. 

Defining Funding Round

At the outset, entrepreneurs must secure capital to fund their business operations, with venture capital serving as a primary financing source for these purposes. It is also a systemic process that depends on the startup’s scale and growth during the calendar year. In turn, startups must raise funds from available investors, mostly presented as venture capital firms or angel investors. After the completion of the transaction with securing sufficient capital for accomplishing the business objectives, the company starts a funding round. In this regard, different rounds of startup funding occur after a successful startup’s expansion in terms of both size and scope, thereby resulting in an increased valuation of the venture. It is necessary to admit that there are instances when a company fails to adjust to market conditions or underperforms after securing the funds. This type of startup founding round is a down round, which is an outcome of poor financial management and planning. 

Process Illustration for a Funding Round

Each stage follows the formal process of financial analysis, due diligence, and negotiation. Startup company funding rounds vary by the aforementioned growth in value and revenue, increasing the complexity of settlement talks as the mature startup requires sufficient funding with correspondingly increasing risks. Thus, the early rounds involve agreeing to a lower valuation, anti-dilution protection, pro-rata rights, and liquidation preferences. Investors strive to protect their interests and funds, while these terms regulate their future participation in the funding rounds. In subsequent rounds of startup funding, term sheets include a much higher valuation with minimum contractual provisions as investors gain greater confidence in the company’s prospects. The focus also shifts towards strategic alignment and value creation, with funders seeking to sustain the company’s expansion and maximize their return on investment.  

Determining the Required Funding Amount

The decision-making process must follow a simple principle of not raising additional funds that would exceed the buffer of your total budget. In turn, all rounds of funding for a startup should include approximately 15% of estimated capital needed to minimize operational risks. At the same time, an entrepreneur should conduct internal and external analysis of the market by considering major factors that will affect the firm’s performance. The current stage of startup funding rounds, market size, competitors, technology, and legislative with political impact comprise the main constraints for the analysis. In this regard, it is highly recommended to design several scenarios with an emphasis on ROI-based goals to estimate a project’s budget. Startup funding rounds explained in the further reading will list average capital expenditures to visualize the scale and value of specific stages. 

Relationship Between Valuation and Funding Rounds

While funding rounds constitute the stages at which a business venture secures funds from investors, valuation expresses a startup’s market value based on its revenue, potential, and forecasts, thereby determining the equity offered to funders in exchange for the invested assets. All rounds of startup funding have their corresponding valuation in a specific amount of currency like dollars. In turn, there are pre-money and post-money valuations depending on the processed transactions, and these distinctions are crucial during the negotiation of funding the next startup funding rounds, outlining the specific exchange of capital for equity. The valuation concept, therefore, illustrates the price investors pay for a portion of the business during each funding round. 

Types of Funding Rounds

Most startup reviews or listings with the most promising startups mention that the project has secured series B funding while not elaborating on this crucial milestone. In this context, it is possible to categorize into three groups of investments: equity, alternative financing, and debt. 

Equity

Equity financing is the most recognized and popular method, which includes the startup funding rounds list. There are the next classification of equity subtypes:

• Pre-seed. At this stage, entrepreneurs use their personal assets and connections to raise capital for the product launch. The average estimation of this earliest funding round is $50,000. 
• Seed. The following stage involves securing funds from angel investors or angel groups that consist of wealthy private investors focused on emerging startups. This funding round can reach a size of $1 million.
• Series A. With the startup’s growth, the average size of investment comprises $3 million. Moreover, the company has a stable financial performance expressed in the generated revenue. At this stage, projects secure their funds from venture capitalists. 
• Series B-C. While series B funding reaches the size of $10 million, series C comprises  $20 million. These stages are the most essential milestones for a startup as they demonstrate initial product-market fit, while CEOs can evaluate cost-per-acquisition and lifetime-value of the developed product necessary for solidifying the brand’s performance. 
• Series D-F. These funding series are rare and final stages before the enterprise offers its shares to the public. The average funding on the D stage is $50 million; the E and F series range around $100 million.
• IPO. With an average size of $250 million, the enterprise issues share via an initial public offering (IPO). 

These different rounds of startup funding indicate how startups can grow into powerful business entities through successful scaling. However, it is reasonable to admit that early stages of funding may involve both angel investors and VC firms. Funders can also lend their expertise by supporting strategic decision-making and managing the enterprise in addition to the provided assets. 

Alternative Financing

Some businesses prefer this approach to build the foundation of their companies. In turn, this category is not related to debt or equity financing due to the unique process of securing the capital. However, these alternatives are suitable for small businesses that do not aim to secure assets equivalent to series B funding. There are next types:

• Crowdfunding. Startups use online platforms to collect money from users who might see the project attractive to them. The average campaign allows the entrepreneurs to raise $5000 while offering the ready product to their investors. 
• Receivables Factoring. The company sells the invoices at a discount to investors, which allows the company to get immediate capital and scale the business. In turn, the average deal can reach $50.000.
• Receivables Financing. In this type of financing, the company lends capital by using those invoices as security. In contrast to factoring, the startup can raise more than $1 million by using this method. 

Newcomers prefer alternative financing as the company can enjoy extended freedom in making decisions without losing equity or following strict banking rules. Additional flexibility and fast access to capital further contribute to the creative process, allowing these small ventures to experiment with ideas and follow their vision. However, a few ventures achieve their goals due to high-risks associated with the nature of alternative financing.  

Debt

Borrowing money from lenders remains the common method of financing the business venture. Companies can reserve these funds under strict terms, requiring entrepreneurs to demonstrate their firms’ profitability, equity, or have collateral. Moreover, some startups choose to loan money after initial startup company funding rounds to avoid equity dilution, and this alternative can be a better decision since the startup will not sell equity. 

• Venture Debt. The company can lend up to $5 million depending on the raised equity after the Rounds of startup funding. This practice is common for growth-stage ventures.
• Loans or Credit Lines. Companies can take a loan of $5 million by using this traditional financing method. This approach is suitable for established startups with collateral or stable revenue.

Debts can be a decent funding source due to the extended autonomy and preservation of the firm’s equity. However, such an approach does not provide networking opportunities and expertise, while collaboration with VC firms further strengthens the startup’s credibility.  

Sources of Startup Funding

Based on the product type and scale of operations, entrepreneurs should choose a suitable startup source. Additionally, it is important to consider prior experiences as long-term development requires more than capital with financial investments. Funding sources also tend to evolve in the contemporary market, introducing government-based initiatives for foreign startups or accelerators with incubators. Thus, there are several types of funders:

VC Firms 

The most popular option in sourcing the startup funding. In addition to financial investment, VC firms diversify their services by creating accelerators and incubators that are the perfect choice for new founders who lack expertise and industry connections. Flexible amounts of capital with diverse services aimed at building the startup’s success is an excellent method to scale the operations. However, the majority of VC firms support the funding rounds until series B funding as venture capitalists prefer to focus on multiple projects with higher ROI potential and control. Higher investments also imply higher risks, which is another considerable factor in their decisions. 

Angel Investors 

These funders operate in a small group or independently, offering their investments and expertise at the early startup funding rounds. In contrast to VC firms, this type of sourcing does not provide structured growth support, especially in the later rounds. However, minimum bureaucracy and focus on highly innovative projects make angel investors a perfect choice for visionaries. 

Government

Some governments launch initiatives to attract foreign capital and talent. Officials can collaborate with local VC firms or banks to support startups, creating comprehensive support for enterprises in their early stages. Moreover, it is a decent option at the beginning of startup company funding rounds due to the business-friendly nature of programs.

Personal Connections 

These connections include, but are not limited to family offices, high-net-worth individuals, and affiliates who offer personal loans. However, this approach to sourcing operations is recommended for small ventures that will not scale exponentially. Entrepreneurs must embrace high commitment and self-organization skills to manage their business. 

Banks

This source includes fintech institutions and traditional banks that take interest instead of equity by offering loans to companies. Most established ventures shift to this sourcing option to attain autonomy and grow independently from investors or VC firms. Therefore, inexperienced entrepreneurs and early-stage startups should consider banks as a future source of funding. 

Primary Uses of Startup Capital

Indeed, business owners must draft a plan to visualize the startup development process. All rounds of funding for a startup require attentive planning and adjustments to sustain the growth while setting specific ROI-based objectives to ensure that the project will meet the funders’ interests. In this context, entrepreneurs should consider the next primary uses:

• Product Development and Innovation.
• Marketing and Sales.
• Recruitment and Team Expansion.
• Operational Expenses.
• Customer Retention.

Depending on the rounds of startup funding, it is critical to prioritize some of these activities while balancing spending efficiency with long-term sustainability. There are instances where a small team of entrepreneurs can operate without recruiting additional staff at the early stage of startup, excluding hiring and training costs. At the same time, marketing expenses might grow exponentially in addition to research and development operations. 

Investor Motivation for Providing Capital

Typical startup funding rounds involve negotiation with funders on the matter of high financial returns, strategic influence, and industry innovation. However, contemporary investors focus on innovative projects or disruptive ideas that can revolutionize stale markets. It also means that VC firms or angel investors emphasize a crucial role in a startup’s success with its potential to contribute to global changes. Startup company funding rounds have a crucial role for capital providers as it is an opportunity to strengthen their credibility and portfolio. In addition to these considerations, some investors prioritize high-risk ideas and creative solutions to achieve the mentioned goals. This concern stresses the newcomers by forcing them to build a compelling vision of the future products and services to secure funds. 

Common Mistakes in Capital Raising and Recommendations

New companies should be aware of the common challenges in building their legacy. Some of these mistakes occur during the planning process, while the rest issues arise during the next startup funding rounds. Some entrepreneurs become overdependent on investor’s guidance or fail to develop long-term objectives. Examples may include the following:

• Choosing the wrong type of capital (types of funding).
• Ignoring the investor’s objectives (motivations). 
• Neglecting communication with investors (before and after funds transaction).
• Raising too much capital per round. 
• Not preparing for future rounds. 
• Undervaluation or overvaluation of the startup.
• Neglecting contractual provisions.

Final Suggestions

Consequently, startups can fail due to these common mistakes, and entrepreneurs should educate themselves on the basics of capital raising. For instance, learning the startup funding rounds list is necessary to not lose focus and have the vision of growth on the next round. Timely responses to the issues comprise another valuable recommendation for successful scaling. Starting a business requires sufficient networking skills and the ability to communicate with investors and partners. In this regard, personal values with philosophy are necessary to navigate in this complex and highly dynamic environment. Values, vision, and goals must be the foundation in making strategic decisions while compromising these essentials will result in loss of brand integrity and trust.