Raising capital by the ventures or startups at early stage is tedious task as the information and future projections about the startups at that nascent stage are not clear to the investors. Ultimately, at this stage it is an unproven business model. At that time, getting seed funding and getting funded from the angel investors, could not be achieved by all the startups. As the time forwarded, investment tools (causeartist.com/invest-social-impact-ventures) also changed time to time.

Seed Funding And Early-Stage Funding; Know The Key Difference

In earlier days, getting funded was not easy but now a days new technologies and platforms have given entrepreneurs a plethora of new ways to make funding possible. Nowadays, there are more options than ever to get a new company funded.

CrowdFunding Vs. Syndicate Funding

Syndication and crowdfunding are also the terms that have been used interchangeably since long ago but their concepts and meaning have become increasingly confused. Syndication focuses on funding relationships and structure between the funder and funded whereas crowdfunding is a method of finding investors (or backers) with the cornerstone philosophy of ‘strength in numbers’.

1. CrowdFunding

Crowdfunding is the method of raising money from the crowd by selling or propagating startup’s idea to the masses or crowd via Internet.

Mass advertising of a project or offering outside of one’s immediate personal network is done by the startups or crowdfunding sites. When the idea reaches to more masses, there is probability of getting better crowdfunding.

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The term was first introduced by Michael Sullivan on August 12, 2006, in describing fundavlog: “Many things are important factors, but funding from the ‘crowd’ is the base of which all else depends on and is built on. So, Crowdfunding is an accurate term to help me explain this core element of fundavlog.”

There are many sites available on the Internet who are supporting startups raising crowdfunding. These sites works a deal with the syndication group to be the intermediary in helping startups raise capital.

Crowdfunding is not equity based and it is an easy tool to increase the visibility of the startup as well as raise the capital by attracting investors easily through Crowdfunding platforms.

Differences In Startup Funding Stages; A Complete Guide

2. Syndicate Funding

On the other hand, Syndicate funding or participation funding refer to the type of funding relationship between the funded and its funders, including the relationship between multiple funders. In other terms, syndicate is an investment vehicle that allows investors or backers (a new investor with less experience in investing) to co-invest with relevant and reputable investors or leaders (business angels with vast experience) in the best startups in the market.

Leader chooses a startup to invest in, offers relevant data such as valuation and capital to be raised and specifies the time to close the deal of investment. If backers are interested to invest in the startup then they can invest in by specifying the amount of investment.

Such investment vehicle accelerates by adding more startups, adding more backers and encouraging investors to invest more. All parties involved in this type of funding gets benefited with certain benefits (percentage of profit).

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Having an startup idea and implementing that idea into the real grounds are different things and each step taken by the startup needs crystal clear vision and to solidify that vision into reality founder needs funding flow to let visualize the idea.

Money is the fundamental resource to keep the lights on, to build strong team, to build the strong product, to market the product, gaining traction etc.

Raising money/funding may not have been required when you started building the company, but in later stages it is required to gain the sustained growth and traction. There are different types of investors in the market to fund the startups, however different stages are there to understand to get funded from the investors and venture capitalists.

The five startup funding stages outlined below provide a foundation to get you started-

1. Seed Capital

Seed capital is the first source of investment your startup requires. Seed capital as one of the first Startup Funding Stages may be sourced from channels such as friends and family (F&F), crowdfunding, credit cards, your personal savings, Syndicate funding (includes a startup, a lead investor and backers), P2P Lending Platforms. No matter whom you raise money from, there is no free money, and interest on their investment in your startup should be clearly defined. You should provide tangible deliverable and milestones and update them regularly on your progress. The purpose of the money you are raising at this stage is commonly focused on research and development for an initial product, or a minimum viable product (MVP). There are different seed accelerators who are potential options if above mentioned channels are not fruitful. In my view, accelerators are one of the best options available who invests in both your startup and your potential to develop and pitch your solution to potential investors. First take the time to prepare, research, and validate your idea then approaching an investor for a higher likelihood of acceptance is the best idea. Apart from accelerators, there are many of the venture capital firms also who are providing seed investments to the startups.

2. Angel Investment

After the seed funding a startup taken and created a minimum viable product through it, now the time comes to let your startup grow and to this you need to increase funding. This kind of funding is required towards product development, marketing, expand your team to keep up the momentum. For this, angel investors come as a solution. If your startup is raising money at this stage, your business model canvas should be proven. At this stage, angel investors not only help startups in funding point of view but also they help the startups gain success, provide strategic assistance as well as play roles such as advisers also. Angels are different from other investment entities such as Venture Capital firms since they are using their own money and should be treated as such when solicited for funding. They may invest individually or also pool their money with a group. Since the money raised at this stage can be significantly higher than in the seed round, investors will also expect a compelling and well-researched pitch as well as partnerships such as equities in the startups.

3. Venture Capital Funding

Venture Capital Funding comes after the angel investment where the size of such funding is much larger. It is used to scale the business to new business channels, customer segments, or to increase marketing efforts for additional customer acquisition. At this stage, your startup might be either profitable or could benefit from offsetting the negative cash flow with this new wave of investment while the business continues to grow. Multiple rounds of funding such as Pre-series A, Series A, Series B etc. may happen at this stage of funding, and investors may also join the organization and provide additional expertise. In this stage also, various offerings such as equity, SAFE (Simple Agreement for Future Equity), and convertible notes are provided to the investors/venture capital firms. Since VCs are investing other people’s money, their job is to make a sound investment in businesses that are likely to yield a meaningful ROI for their clients. VCs make a careful and critical examination of startups regularly, so when you pitch to them, be engaging and be prepared.

4. Mezzanine Financing & Bridge Loans

This is the stage where your startup seems to be growing significantly with a commercially available product, revenue should be coming in regularly although the startup is not yet profitable. The raised capital at this stage is used towards expansion of startup to new horizons, new mergers, new acquisitions, or the founders may be preparing for an IPO. Investors at this stage want to see a clear road-map towards profit shortly. For example, mezzanine financing can cover the expenses that an IPO involves. With the profits made from the IPO, the mezzanine investor is paid back with interest.

5. IPO (Initial Public Offering)

Very few startups reach at this point where for many this is not the end goal. IPO is an option to expand their business further. All of the investors who have invested their money for equity until this point will ideally recoup their investment along with additional profit, some investors may retain their shares, and some of them sell their stock at the beginning to reap the rewards of getting in early. After the IPO, stock options for a growing company can be leveraged to attract top talent and the increased access to capital can provide resources to push the momentum of your business forward. Planning for an should begin 24 months before since all such as reconstituting the board, setting corporate governance in place, raising a secondary round if required, identifying and discussing with merchant bankers, getting the documentation right takes time. IPO market way is the route where company is in high growth business and gaining profitability and revenues.

Also read- How to create/register a company for startups online in India.

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