When companies look for funding, they need to take into account the various stages of development. The accomplishments of an organization will play a major role in what type of investments make the most sense. A company’s stage of development will influence the type and amount of information that they can provide to investors. When looking for seed funders or venture capitalists, entrepreneurs need to ensure that they look at the types of organizations in which the fund has historically invested. Firms tend to stick with companies that are in the same stage since they have learned exactly what to look for in that period. Following is a basic outline of the different stages of a startup and the types of funding that are typically most readily available to it at each stage.
Getting Funding at the Seed Stage
At the seed stage, companies are little more than an idea. Seed-stage companies generally have no revenue and often no product. In this stage, entrepreneurs need to conduct necessary market research and develop a revenue model. Also, it is important to talk to potential customers and refine the business plan. If entrepreneurs have not done this before they contact investors, it will be exceedingly difficult for them to secure funding. In truth, obtaining funding at this stage is already difficult, and many entrepreneurs end up relying on friends or family or bootstrapping the idea. Another great way to get some quick money is crowdfunding.
The best bet for an outside investor is an angel investor. These individuals may invest in a company at the seed stage or early stage, unlike venture capitalists, who tend not to be very interested in seed-stage startups. Most angel investors were once successful entrepreneurs, so they understand how to progress past the seed stage and can prove to be excellent business partners. Angel investors tend to look past the bottom line and the numerous unknowns to consider the real potential of the idea behind a company. The unknowns are often too risky for venture capitalists, although a small portion of them may be able to be persuaded. A quick look at the history of each venture capitalist can show whether or not they have any interest in seed-stage companies.
Moving into the Early Stage
Companies are considered to be early-stage startups when the seed has begun to sprout. While a company has some roots, it is still a major risk for investors. Typically, early-stage startups have a product or service offered to at least a small customer base. The company should have evidence of customer approval and feedback, as well as some degree of revenue. However, some early-stage companies still do not make money. During this stage, entrepreneurs can attract the attention of both angel investors and venture capitalists.
About 40 percent of investments from angel investors and 44 percent of venture capital investment occurs at this stage. If entrepreneurs can create a convincing case for the future of a company, then they have a good chance of obtaining significant funding during the early stage. In order to attract attention, entrepreneurs need to demonstrate that the company has real traction. Entrepreneurs need to focus on what has been accomplished without funding to hint at what could be accomplished with some additional capital. This process could make investors feel like they might miss out on a great opportunity and light a fire to make an investment. If possible, entrepreneurs should discuss revenue, since that provides numerical proof of the viability of a company. Then, it is important to show how investment can increase that revenue.
Additional Funding at the Late Stage
When companies have entered the late stage, they have proven to be robust enough to become major industry players. While late-stage companies are mature and secure, they often still need funding for a variety of reasons, from opening new manufacturing facilities to developing new product lines. At this stage, investors will want to know exactly what their money will be used to do, so entrepreneurs need to spend a great deal of time researching what they want to accomplish and prove that it is possible. At the late stage, entrepreneurs will only very rarely catch the attention of angel investors, but ventures capitalists make 22 percent of their investments during this period. However, it important to understand that
even venture capitalists tend to target companies in the earlier stages, so pitches need to be extremely focused.
Some investors have a history of late investment, and targeting these individuals will increase the chances of obtaining funding. Moreover, entrepreneurs should look for investors with a demonstrated interest in the industry that the company works in, since they are more likely to understand its potential. For companies that do not want to give away equity at the late stage or that have difficulty in finding investors, loans can prove to be a great option. In terms of loans, companies should have concrete needs that are not time intensive. If a company is on track for a sale or initial public offering in the near future, then equity may be the best option.