Funding Models For Startups

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Welcome to the fun finance portion of the internet where information is all around and terms start to have more than one meaning. Finance isn’t easy, but it is important to understand the basics to stay on your feet as an entrepreneur. You may be asking yourself, “What are the best financing options for a business?” Well, there a few different types of funding for business ventures and a few specific different types of funding for startups as distinct from cash-flowing private equity or public businesses. Let’s broaden things to 3 types of funding: grants, debts, and investments. Grants are funds that you don’t need to pay back, but are difficult to find for for-profit businesses and may require some level of reporting. Debts and Investments can both be captured from venture capital investment firms and angel investors. Lets look at a sources of funds example: the best way to not give up equity while still acquiring capital is debt financing. However, anyone with a car or a house can tell you that debt can be a tough thing to stay on top with monthly payments and requires a lot of up-front documentation with pretty strict barriers to entry. The Small Business Administration of the USA and local Community Development Financial Institutions may be able to help you qualify as a small business if you’ve been denied traditional loans. In regards to startups where traditional paid debts don’t make sense, we often suggest SAFE notes, a form of convertible note developed by Y-Combinator to make numerous investments while minimizing their accounting bills and maximizing their financial outcomes. SAFE notes are a type of debt called a convertible note which will convert into equity at a later date with more favorable terms for the investor.

Series Funding

Of all the times I’ve looked around for seed capital charts on where I should be looking and what sort of sizes of rounds to be considering, I haven’t seen a basic outline of all types of series and what to be looking for in each letter. Granted, each company has a very different looking financial raise structure which depends on their valuation and industry, there are some basic similarities and suggestions to be thinking about for each round that you may find helpful.

Pre seed funding : All you need here is a good pre seed funding pitch deck and some level of traction for your business. Keep pitching and an angel or competition might pick you up and get you some early funding to keep running. A good rule to follow is to consider what level of financing you need to acquire and start as small as possible. I’d suggest a “Friends and Family” round this early in the game with a limit around $50,000. As an example, let’s assume you pull in $10,000 for Pre-Seed early money.

Seed Funding: Seed funding can arguably be one of the most important rounds you pull in since it can be so difficult to find in some under-invested states. Seed rounds can be anywhere from $100,000 to over $2,000,000 depending on the size and industry of the company involved. The best way to think about rounds of funding is in building 10x traction. If you raised $10,000 in your previous round, you should raise $100,000 in this round and then $1,000,000 in your next round and keep jumping with the traction you’re building. Therefore, as a CEO or Founder, your role should be solely to build the best company you can build with a monetary goal of 10x the valuation of your company with each new funding round. If you are not building the value that quickly, then you can pull what is called a “Bridge Round” where you haven’t quite pulled up the next round valuation yet, but you’re running low on funds and need to pull more capital. A bridge round can be a smart way to stay afloat while you continue building the value of your equity.

Series A Funding: At this point, it will be important to consider and evaluate your Series A Valuation since this may be your first larger round and valuation that is running on preferred stock instead of convertible notes. Cap table calculations can get wild from here on out. Generally looking at somewhere above the $1,000,000 range. If you’re in an industry like Biotechnology or Medical Devices which need to pass FDA standards, this may be the first actual round where you start to make money - which can be a difficult road.

Series B Funding: Series B for most companies will scale up another 10x from previous rounds. In our example, let’s say we did well and our series B raise is $10,000,000

Series C Funding: Series C is where we are really establishing ourselves and looking at additional expansion - internationally or to new mergers and acquisitions. This will be where we start to see acquisition offers more seriously and continue to expand. In our example, $35,000,000 raise.

Series D Funding: From Series D and beyond, the amounts for each raise can vary wildly. Sometimes these rounds are bridge rounds during specific economic situations and other times they are raised for specific expansion purposes.

Series E Funding: Series E is a late-stage round for a company - it is most likely being used to push for more growth or prepare for exit.

Series F Funding: Most companies don’t go further than F financing - you’ll be looking to have an initial public offering or some sort of large scale exit after this.

Venture Capital Funding

The impact of venture capital in entrepreneurship is nuanced; there are venture capital advantages and disadvantages. An advantage is that large amounts of capital can be acquired under the auspices of rapid growth, the disadvantage being no time for steady growth, only rapid growth. Let’s look at the difference between venture capital vs private equity through the lens of a venture capital example: when venture capital firms make an investment, their primary bottom line is the perceptual value of the company they invested in with a sole goal of a large, valuable exit from your company. Therefore, the most important uses of late stage venture dollars are for marketing and sales to increase the revenues, market shares, and valuations of the companies in which they are investing. This can often lead to interesting bloat in companies which becomes apparent when they become public and then deflate. However, private equity is there to try and accomplish the opposite: strict and stripped down companies which function like clean money machines and therefore can be sold for an increase in valuation not based on speculation, but based on cold hard fact. There are exceptions to the rules, but this is how the money game is working broadly in investments. In the next section we discuss the types of venture capital funding →

Types Of Funding For Startups

There are a lot of types of funding sources, but the purpose of entrepreneurship is to find the right funding source for the business you’re looking to start. The best thing I can encourage you to do is become a life-long financial learner who learns about new programs and opportunities offered by the SBA of the USA, local CDFI’s, small business grant-giving organizations, local area development initiatives, governmental stipends, grants, and opportunities, traditional and nontraditional debt resources, angel investors, venture capital, private equity, and real estate investment short-term debtors. There is a whole wide world out there, and all of it is interested and specific in its use. I’d like to take a moment to go over some types of venture capital funding because there are really only two: debt or equity. Sometimes they like to mix, but most of the time everything leads to some form of equity. Convertible notes will convert into equity, and equity rounds are just selling equity for money to continue growing the business. If you’re headed after Venture dollars, make sure you’re looking for a good partner rather than just bringing money on board; there is plenty of money out there, but probably only a handful of places you should actually be pulling money from. As an example, if someone is offering you $500,000 but someone else is offering $300,000 and are a marketing company in exactly the industry you’re in while you are weak on marketing, the $300,000 actually has more weightedvalue because of the benefit of having a good team member and resource for marketing support. I like to ask myself, if I had money right now, what would I be spending it on? If you can find that resource that is willing to do the work without direct pay, then it is advantageous to work with that resource. In the example above, the marketing agency making the investment will likely put more than the difference of $200,000 of marketing work into the company in the lifetime of the investment.