CA Namita Gad
Every day we come across with at least one news about fundraising by startups… raising $2billion at a valuation of $18billion, fueled $8million in pre-series A funding, bridge round of $5million and so on. Emerging startup businesses have come up with a variety of innovative ideas but funding is the real challenge. Let us have an overview of different funding rounds in startup.
This is not an actual fundraising as it does not involve external investors at all. Founder bootstraps Company’s growth with internally generated funds or past savings. Mostly this is done to build the prototype or product before asking outside investors for money. This is better for the Company as there is no equity dilution.
2. Funding from Friends & Family:
After investing own money, founders raise cash from their friends and family. This is very informal route but does hold personal as well as professional risks. Founder needs to be transparent about the risks of investment with the members. Difficulty at this stage is of valuation because most of the times no professional advisory is taken for valuing the Company. And when it comes to fundraising from professional investors, the founders are forced to down-round (i.e. valuation at lower amount than previous funding round) which upsets friends and family investors and results higher equity dilution.
3. Angel/Angel Syndicates Investment:
This is for the first time when professional investors are asked for their money. Such angel investors include individual or collection of individuals (Angel Syndicates) who are previous startup founders who have had exits and HNIs. These are early stage investors and therefore expect fair amount equity for an early bet on the Company, higher risk-return ratio and continuous dilution at each round of fund raising.
4. Seed Funding:
Seed capital is infused when Company proves its business idea and potential viability in the market. It gives momentum to the operational activities. Seed round is financed by professional investment firms or early stage venture capitalists. This can also be called pre-series A funding.
5. Series – A Round:
Venture Capitalists enter at this stage even though Company may not be profitable but based on the metrics and due diligence, they arrive at the valuation and put in their money to offset the negative cash flow and accelerate the growth. At this stage, money is typically received in exchange of preferred stock. These rounds sometimes include strategic investors who offer value in terms of marketing or technology.
6. Series B/C & Further:
Series A is followed by Series B funding and so on. Large VCs pump lot of money for growth and expansion of Company. Different rounds by VCs bring different valuations which can sometimes lead to down-round. One of the reasons for down-round is raising too much capital at too early when the business is not fully baked.
7. Mezzanine & Bridge Financing:
The ultimate aim of any startup is to go for an IPO or get acquired by some giant company (mostly competitor) or management buyouts. Such strategic business decisions need money for execution. To get this, Company tap into Mezzanine or bridge financing, which is a short-term debt to support this business opportunities while preparing for IPO, acquisitions, management buyouts or leveraged buyouts. Such debt is often for 6-12 months. Sometimes bridge funding is raised between seed funding and Series A funding for equity exchange to offset the negative cash flow or finance the working capital requirement till series A funding.
Finally when Company hits the IPO or goes for Acquisition/Buyouts, investors actually earn return on their investment by redeeming their equity. This is an exit point for founders and investors but before that startup has to hustle for various funding rounds.