While no two startup’s paths are the same, the road toward funding a startup tends to have certain steps and distinct stages. These four stages may have a variety of names for different businesses in the industry, but generally, are known as the following:
Seed Stage/Seed Rounds
Seed stage/seed rounds is the earliest stage of raising startup capital. At this point, the startup is still figuring out the businesses’ logistics: product and business plan and basic salary needs, research, and operating expenses. At this point, the business will also be attempting to find its place in the particular market. Seed stage rounds tend to be small and usually take the form of convertible notes, convertible SAFEs, or common equity.
Startup Stage/Angel Rounds
At this stage, the startup is moving out of simple ideation and into beginning product production and/or gearing up to enter the market. Revenue may or may not be coming in at this point; however, it’s likely operating at a less and using capital funded by “angel investors. Angel investors are usually looking for high potential returns on their investments. Angel rounds are the most diverse and can take just about any form: convertible notes, convertible SAFEs, common equity, preferred equity, warrants, or something else entirely.
Expansion Stage/Venture Rounds
In this state, the startup will begin looking to find new business/sources of revenue in order to expand beyond the startup moniker. Funding may be needed for increased marketing efforts, new retail locations, increased hiring and recruiting, etc. At this stage, venture capital firms and other institutional players will often come in to provide increased capital. Large venture rounds usually take the form of preferred stock.
Now moving toward self-sufficiency in the form of sustainable revenue streams or with an exit event, the startup is becoming quite successful. If at some point the company decides to go public, the IPO process can be lengthy and expensive. Consequently, while the financing is often provided through venture capital firms, it may still be necessary to help fund the process and continue to sustain the company’s growth.
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