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An important aspect of starting a business is understanding the different stages of growth funding and how they can impact a company's trajectory. Moreover, the typical investment size for each stage can vary depending on several factors such as industry, a company’s revenue and growth potential and an investor’s risk profile.
In this article, we will take a closer look at the six main stages of growth funding for start-ups including a general range of investment sizes for each stage:
1. Pre-Seed Stage
Earliest stage of funding for startups,
Companies are focused on developing their business idea and trying to validate the concept.
Pre-seed funding covers the costs of researching and validating a business idea, as well as the initial expenses such as market research, developing an MVP or creating a prototype.
Funding sizes: $10k - $500k
Sourced from: founders, family and friends, grants, and crowdfunding.
Example: Dropbox raised $15,000 from Y-Combinator, a start-up accelerator, to create a prototype of their product.
It should be noted that not all startups go through the pre-seed stage, some start-ups may be able to secure seed funding directly from seed stage investors, but for those who are not able to, pre-seed funding can be a useful way to validate a business idea and attract seed stage investors.
2. Seed Stage
Once a business idea is validated, a company requires seed funding to support it working on its business plan, developing its product or service, and building its team.
Seed funding covers the costs of R&D, and initial operating expenses such as rent, equipment, payroll etc
Funding sizes: $50k - $5m.
Sourced from: angel investors, friends and family, crowdfunding, and venture capital firms that have a focus on seed stage investments.
Example: In 2009 Airbnb raised $20k from Y-Combinator and then a further $600,000 from Y Ventures and Sequoia Capital, to develop their platform.
3. Early-stage – Series A
Startups usually require funding through a Series A round when they have a functional product / service that is generating revenue and is growing its customer base.
Series A funding supports a company’s growth strategy including marketing and sales and expanding its team and operations.
Funding size: $2m - $20m
Funding source: venture capital firms, strategic partners.
Example: Uber raised $11 million in Series A funding from Benchmark Capital, First Round Capital, Sequoia Capital and others to expand their team and operations.
4. Growth Stage - Series B
Series B funding supports startups to scale their business beyond the development phase by expanding their market share and increasing revenue.
Series B funding covers the costs of expanding operations, hiring additional staff, and investing in new technologies or products.
Funding size: $20m - $100m+
Funding source: venture capital firms, private equity firms, investment banks and strategic partners.
Example: In 2009 Twitter raised $15m in their Series B funding round from Spark Capital, Bezos Expeditions, Union Square Ventures and others.
5. Late-Stage - Series C
As a startup continues to grow and mature, it will typically move into the late-stage - Series C round and is focused on optimising its operations and maximising profitability.
Series C funding covers the costs associated with expanding into new markets, making acquisitions, and paying down debt.
Funding size: $50m - $100m+
Funding source: venture capital firms, private equity firms, hedge funds and investment banks
Example: Facebook (Meta) raised $240 million from Microsoft to fund their Series C round, and eventually went on to IPO at $16 billion, making it one of the largest IPOs to date.
6. Exit Stage – IPO
The final stage of growth funding is the exit stage or IPO (Initial Public Offering).
This is when a company prepares to offer its shares to the public, which generates further funding for the company to grow
Creates a liquidity event for its existing shareholders and employees.
Investment banks will prepare and underwrite a company’s IPO critical role in the process by assessing the company's financials, preparing registration and disclosure documents, marketing the IPO to investors, managing the allocation of shares and pricing, and supporting the company post-IPO.
Example: In 2014, Alibaba raised $25b on the NYSE, which was the largest IPO at the time, and remains the largest IPO for a tech company.
Funding is an important aspect of starting and growing a business. Therefore, understanding the different stages and funding sources available at each stage can help startups make the most of the opportunities available to successfully grow. It should be noted that the above stages are not fixed, and a start-up can jump from one stage to another depending on the circumstances.
Furthermore, startups need to be aware of the fundraising environment and be ready to pivot when necessary. Building a strong team and a solid business plan, and always being ready for the next fundraising round will help your company navigate the different stages of growth funding and reach your goal of a successful exit.
Contact Pinnacle Global Advisory to see how we can help you get ready for your next fundraising.
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