How Funding Works

The first thing we would like to clarify about funding is:

While there has been a huge amount of hype in recent times about fund-raising and all, unlike popular perception, startup funding is not a guarantee for success, neither should it be the aim of a startup… It is just a milestone achieved by the team trying to disrupt some industry using that capital and in many successful cases is not even pursued initially… (called BOOTSTRAPPED Startups) like MailChimp and AirBnB.

so let’s cut to the chase and see what are the various rounds of funding:

  1. Bootstrapping the startup : Often when a product is ideated, initial investment until a minimum viable product is developed (MVP- will maybe discussed in detail in a later article) is put in by the co-founders using their savings, lending from relatives,friends etc.
  1. Seed Funding/Angel Round & Pre-Series Rounds: After a MVP is developed and the team is looking to expand team and market the product to the early adopters, the team looks for seed investments from angels in return for equity.. These angels are generally entrepreneurs, incubators, accelerators or individual VCs. Very rarely do institutional investors take part in angel rounds although.lately, these firms have been trying to catch the trends early and starting to take part in angel rounds also.
  1. Series A: This is generally a bigger round of funding when the product has gained certain amount of traction and requires capital to tap into new markets, develop new features, expand team and market the product… The valuation of the startup is officially first determined in this round and is used as base for all further rounds. Generally early stage and growth stage VC Firms take part in series A.
  1. Series B & Beyond: The company requires further capital to expand, grow and accelerate and uses the money to fund these plans.
  1. Mezzanine Stage/ IPO : The company has reached a certain level (Generally at least Unicorns,i.e billion dollar valuation) and needs to raise money. Often companies at this stage take the company public by listing their company on the stock exchange and raising money through equity released in market.

We hope you found this article on the various rounds of funding informative…. Our next articles will be on valuations….

-By Kunal Aggarwal


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