A startup takes more than just an idea to get off the ground. It’s a combination of time, effort, dedication, focus and, of course, funding. Over 60% of all startups need external investments to get off the ground and where the average cost of developing an app or software platform is over $200,000, most people don’t have that kind of money sitting around.
The first myth to bust here: Raising money is something that you do once and then it’s done.
Before you start out raising your first dollar, go in with the expectation that you will have to do this a number of times before your business is up and running and then even more times to make it successful.
The goal of each funding round is to raise enough capital to grow your idea further and give you enough cash to get to the next round or to the point where the business is funding itself. Funding rounds are usually not quick, and can take as long as a year, so you will need to act well before the need for cash arises.
The different rounds of funding
Funding rounds are usually divided into the following stages:
- Number 1 – Pre-seed/seed
- Number 2 – Series A, B, & C
- Number 3 – the IPO
Pre-seed funding is when founders are trying to get their idea out of their mind and onto paper – they often invest their own money at this stage. This might involve talking to developers, surveying potential users and then validating if their idea is even really worth anything at all.
Pre-seed is followed by the Seed stage, where founders aim to attract what are called ‘angel investors’. These people provide their own funds for further research, testing market needs, hiring a team, and the build of your MVP or completed digital product.
At the seed stage, tech startups can aim at anywhere between $200,000 and $2 million investments, depending on their needs.
Next comes series A funding.
Series A funding needs a business with:
- A proven business model
- At least a minimum viable product
- Some sales
- A profit or at least indicators they are moving in that direction
If you like the show Shark Tank, most of the ideas being pitched are in series A.
The investments at this stage can start from $500K but will require the company to have a specific strategy and goal in mind to reach a higher return on investment for the investor. Venture capital firms, who are usually the type of investor in Series A, ask startups to show real data and progress received from previous investments. They want to see a business ready to scale and get to the next level.
Series B is the first mature round of funding you will go through
At this point, the business is stable, you have a large user base, and you’re looking for funding to stabilise the business and build it into an enterprise. Investments at this stage can range anywhere around $10 million and up, and this stage is all about scaling up the team, growth by acquiring other companies and exploring new markets.
Series C is more just an extension of Series B, but not so big that you are going public.
As one of the last funding stages, it includes not only extending the current product capabilities but creating new products to support it. In series C, you will tend to be working with the largest type of VC firms in your region. Startups at this stage are getting their exit strategies ready to smoothly approach IPO.
The final stage of a startups’ existence is called the IPO or initial public offering and is the process of opening a private company’s shares to the public.
An IPO done well, should make a vast amount of funding available. However, it also means additional complexity and transparency because now you have to deal with shareholders, in addition to investors. This will require a lot of effort and you can expect it to be challenging and expensive.
Fundraising for a startup requires a lot of time and a good strategy and pitch to reach your goal. If you want to understand the road map for your own software project, feel free to get in touch with us at Spring Digital.
