Fundamentals of Funding Rounds

Every scalable early-stage business needs a monetary ladder to get to the top of the mountain. Funding rounds are what create this ladder. In short, funding rounds are the number of times a growing business goes back in the market to raise more capital. Every round helps supply the startup with the money it needs to scale to the next stage. When a business gets enough funding, it can realize its vision faster and more efficiently. Through investment rounds, startups also get the opportunity to craft operations that put them in more profitable positions.

 Stages of Funding Rounds

From pre-seed to pre-public, rounds of funding for startups unfold in several stages. Here are a few of the many different rounds of funding:

 Seed Round

The seed round is often the first round of funding. It unfolds during the idea stage when a startup has just crafted a prototype or proof of concept. Seed Round funding involves minimal financing. The funds poured into the business at this point are used for market research, team expansion, and research and development.

 Angel Round

This round unfolds when a startup is about to launch. Businesses progressing through the Angel round often need certain financing to cover the cost of operations before they’re ready to embrace a significant cash flow. In some cases, the seed and angel rounds merge into a single, hybrid round. Both rounds generally involve getting funding from friends, family, or angel investors.

Series A Round

Since a business is still in the startup stage during the Series A funding round, investing is still considered to be risky. Investors may want to pour in the capital based on certain factors such as its proof of concept, how much they’ve progressed with their initial capital, the quality of its team, market size, the inherent risk of the endeavor, and of course, the startup’s growth potential. 

Series B Round

Series B is when a startup accumulates a higher valuation. As its track record progresses, the financial risk reduces. This stage is when the cost of investment is higher. During the Series B funding round, the valuation of a company is determined by its performance (compared to the rest of the industry), revenue predictions, and assets. A growing startup at this stage would see increased revenue, a larger customer base, and an increase in the popularity of its products. Series B is also when venture capitalists and private equity investors decide to invest in a startup. 

Series C Round

When a business crosses the Series B threshold, it may require capital to brace for the rapid growth ahead. This is when a startup enters a Series C funding round. By the time Series C unfolds, the startup has already proved its success, boosted its market share, scaled up significantly, and even plans to make acquisitions of competing businesses.

 Pre-Public Round

Once a company achieves sufficient traction, it’s time for it to go public. This round of funding is essential to prepare for an IPO.

What Are the Benefits of Raising Capital through Funding Rounds

There are countless benefits of raising capital via startup funding rounds. Some of them include:

·       Higher Liquidity. As you progress through the funding rounds, your startup will have increased liquidity. You’ll have more funds to hire employees, develop new operations, invest in projects, and grow your overall business.

·       Long-Term Financial Security. With your business capital taken care of, your startup will be protected from economic downturns. You’ll also have more control over how you run your business operations.

·       Increased Flexibility. With VC funding rounds, your startup will not be bound by traditional financing options such as loans. You’ll be in a better position to negotiate the terms that work best for your startup.

·       Access to Strategic Advice. Funding rounds in venture capital don’t just supply startups with capital. You’ll have access to experienced leadership to guide you throughout your growth process. 

What Are the Challenges of Raising Capital through Funding Rounds?

While there are many benefits to glean from investment rounds, startups must first overcome certain challenges to become successful. Four of the most common challenges in this journey include:

·       Building a scalable business model

·       Deciding the amount of capital that must be invested

·       Finding the right investors

·       Using the investments wisely once you’ve received them

 Why Venture Capital is a Game-Changer in Funding Rounds

Out of all the funding options available, venture capital continues to be the favorite of most fast-growing startups. The reason lies in the amount of funding VC financing has to offer.

 Unlike other forms of funding (think crowdfunding, revenue-based financing, or bootstrapping) that can offer a few million dollars at the most, venture capital rounds have the potential to offer 10s or even 100s of millions of dollars.

 Aside from significant capital contributions, VC financing also lets startups unlock a wealth of guidance to grow consistently. Startups don’t need substantial assets or cash flow to acquire VC funding. What’s more, VC-backed networking and mentoring services enable startups to grow their customer base, bring valuable talent on board, and even attract other investors.

What is the Role of a General Partner in Funding Rounds

A general partner (GP) is someone who manages the VC fund throughout its lifecycle. A GP could be an individual investor or a partner at a venture capital firm. General partners analyze potential opportunities and call the final shots on which portfolio company to invest in. They are the ones who decide how the overall VC fund is managed. The role of a GP in VC funding rounds involves:

·       Raising the fund

·       Deploying the VC fund’s capital

·       Decided whether to proceed with a startup’s next funding round

·       Managing the fund’s operations

·       Regularly updating the limited partners (LPs)

 Limited Partners’ Impact on Funding Rounds

Limited Partners (LPs) are investors who supply the capital in a VC fund. LPs can either be high-net-worth individuals or other legal and financial entities. Once an LP invests money in the fund, their role is more or less complete. They may offer advice or follow up with the fund’s performance from time to time. You can see them as passive investors who receive dividends once the VC fund produces results. The level of involvement an LP enjoys varies from fund to fund. However, in most cases, they do not exercise the right to make decisions regarding how startup funding rounds progress.