This is an interesting set of stages by George Meszaros. I don’t actually agree that these are the five phases, but I suppose they are five potential phases. There are many other ways to lay out funding rounds, so please keep that in mind.
Five Funding Phases for Startups
Raising money for your startup is never fun, but it might be the only way to get your business off the ground. It is a time-consuming, and often humbling experience. Many founders would rather have a root canal than seek investment, but is part of the startup game.
The stages of getting your startup funded
Stage 1 – Seed Capital
The first stage of startup funding is getting seed capital. Seed money is normally used for market research and product development. As you can tell from the name, seed capital has to do with the very beginning of a company. It is an early investment, pre-cash flow. Sometimes people joke that seed money comes from one of the three “F”s, family, friends, or fools.
Realistically, sources of seed capital are:
- Bootstrapping (use funds from another part of the business)
- Self (credit cards, home equity lines of credit, retirement savings)
- Family members or friends
The size of a seed investment could be as little as $10,000.
Stage 2 – Angel Investor Funding
The next stage of investment is angel investor funding. Sometimes angel investment is in the form of a loan. Angel investors are high net worth individuals, often successful entrepreneurs, but they can also be friends and family.
Normally, angel investors are required to meet the Securities and Exchange Commission’s (SEC) definition of accredited investors. They each need to have a net worth of at least $1 million and make $200K per year (or 300K per year jointly with a spouse).
Companies seeking angel capital might already have some revenue. The investment is normally used for further product development, marketing, and hiring staff.
The size of angel investment is normally under $100,000, but the actual amount varies a lot.
Stage 3 – Venture Capital Financing
Stage three is venture capital (VC) financing. There is a huge difference between angel money and venture investment. Angels invest their own money – note that there there is such a thing as an angel fund where a group of angels pool their money to make investments – and VC’s invest other people’s money.
There are several stages of venture capital investments, starting with the Series A round. Series A is the first institutional round of investment. Subsequent VC rounds are called Series B, Series C, and so on.
The size of VC investments are much larger than angel investments. VC’s want to invest millions in businesses.
There are legal fees of about 1% for a Series A. If you raise $3 million dollars expect to pay $30,000 in legal fees.
Both Angel and VC investors will take a percentage of your business. Many early stage VC’s will want to take about a third of your company. Of course, there is a wild amount of fluctuation as to what percentage of equity founders must part with to get the optimal amount of investment.
In addition to the three early-stage funding options there are two additional options for more mature businesses.