One of the biggest challenges that startups often encounter is the lack of funding. Startup founders often need to source enough funds to get a foothold in the market. The same goes for those who wish to scale their business. Without enough capital, it’ll be hard to keep your business growing. By becoming familiar with the different rounds of funding, you can make important financial decisions that would be vital to the growth and success of your business.
In this article, you’ll be able to learn more about the different rounds of funding and why every step is crucial in building your business.
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In today’s challenging economic times, hard work alone isn’t enough to sustain a business. You’ll need working capital to keep your business growing. However, you cannot just borrow funds from anyone. There are different rounds of funding that you must go through first.
What Is a Funding Round?
Each funding round represents a particular stage of investment. In business, there are different stages of growth. Each phase often requires capital and that capital usually comes from investors. When a person or organization puts in some money to fund your business, it usually comes with the expectation of gaining profit. Some investors would even ask for a stake of ownership.
How Many Rounds of Funding Do Startups Need?
There are no restrictions on how often startups can receive funding. Even so, the typical number of funding rounds doesn’t usually go beyond five. Each stage of funding has different needs and goals. By gaining a clear understanding of what each round of funding exactly represents, you’ll be able to:
- evaluate your current business standing
- determine the right investor for your business
- prepare a well-researched business pitch
What Are the Different Rounds of Funding for a Startup?
1.) Supporters and Family Round (a.k.a the pre-seed round)
As this is considered the earliest stage of funding your new company or business, your immediate source of fund providers will be the people in your inner circle. These are the people who are willing to support you in your new endeavor by providing you with whatever means necessary to bring your business to the next level. The “pre-seed” funders could be your family or close relatives. You can also acquire funds from your supporters and friends. It is also common for startup founders to fund their businesses using their savings or personal income.
2.) Seed Funding Round
The Seed Funding Round is typically where angel investors come into play. This marks the first official funding that a startup or small business raises. According to a study published on Wing VC, the median round size of seed financings has increased to $4.4M in 2Q 2020. It is also likely for startups to have already established their market at this stage.
3.) Series A Funding Round
At this round, the startup has already established a strong market. With KPIs (key performance indicators) showing positive profit margins, the next goal would be to solidify your customer relationships and boost user loyalty. It is also at this round that it’s crucial to convince investors to see the long-term value of your business. You need to optimize your products and develop a strong business strategy that will attract more investors to invest.
4.) Series B Funding Round
At this point, your business has most likely passed its development stage. The main focus of Series B funding is to grow your team and scale your business to a point where you are already ahead of your competitors. You’ve already proven to investors that your business is fully capable of meeting growing demands. The type of investors that your business will attract in this round are those capitalists who are into late-stage venture capitals.
5.) Series C Funding Round
Not a lot of businesses make it into the Series C funding round. At this round, investors are looking for opportunities to invest in successful companies that intend to expand internationally as well as those who are preparing for mergers and strategic partnerships. In Series C, investments usually come from hedge funds, private equity firms, and any institutional investor who falls under the secondary market.
How to Prepare for Round Funding?
Preparing for a funding round isn’t easy. Having a solid grasp of your business case is a must so that you can communicate well with your potential investors. It is also necessary to build momentum in a way that it’ll be difficult for your investors to resist a great opportunity. When writing your business pitch, make sure it is compelling yet concise and transparent. It’ll also help if you’ve already prepared for the worst-case scenario. Always have a backup plan. Of course, one way to seal the deal is to make the investment agreement process as seamless as possible.
With Fill, you can guarantee that every step of the signing process is reliable and secure. Our cloud-based digital signature solution offers a convenient platform to process all your signature requests. You can also have your contracts and agreements signed remotely. This way, your investors do not need to sign those term sheets and other legally binding documents in person.
Knowing that there are different rounds of funding that you must go through first, you can prepare ahead and do whatever is needed to convince investors to invest in your business. It’ll also help you write a clear and compelling business plan that will increase your chances of acquiring funds.
You can also present strategies to help lessen the risks of investing in the early stages. If your small business succeeds, your investors are guaranteed to receive a profitable ROI (return of investment), making the deal immensely satisfactory for all parties involved.
Process your funding requests the secure way. Attract more investors by using a reliable digital signature platform that can handle every stage of your investment process. Fill makes it incredibly easy to get your contract agreements signed on time. You can even automate your document workflows to improve compliance.