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How Funding Rounds Work

Photo by Michael Longmire on Unsplash

Startups need funding, and sometimes bootstrapping isn’t enough to get your startup to profitability. That’s where funding rounds come in. Each time you bring investors in to raise capital for your startup, you’re engaging in a funding round.

Starting a Funding Round

You should begin a funding round when you still have enough runway to get your startup through the time it takes to complete the next funding round. Each round might take you anywhere between three months to more than nine months. Bear in mind that every startup and every round varies, and a successful raise cannot be guaranteed. Funding is traditionally slower in the summer months, and other factors outside your control can also impact your raise. Start your raise well before you run out of cash to sustain your startup.

Pitch Deck

To prepare for a funding round, you will need a pitch deck to share with potential investors. Your slide presentation should highlight your startup’s key information, including basics such as business name and team members, your product and any accomplishments thus far, the problem and solution your product solves, customer acquisition, competitors, and key financial information.

In the early rounds, you’ll need to craft a compelling story to share—you’re selling more of an idea at this stage. Later on, your financials, growth, and customer acquisition information will be especially important as potential investors want to invest in startups that have a strong possibility of thriving. You can learn more about the basics of a startup pitch deck here.

Paperwork

While the pitch deck highlights your story and key information, the other paperwork you provide to potential investors is what backs up your startup’s story. In early rounds, such as when you’re soliciting smaller investments from family and friends, you may not be subjected to rigorous due diligence, but as your startup grows and the potential investments become much larger, be prepared for close reviews of your financials and other statements.

A good due diligence process should involve all of your company information, including financials and accounting, board information, press releases, licensing agreements and patents or copyrights, etc. Keep your paperwork and accounting in order to ensure you’re ready for this process after you’ve caught the interest of a potential investor. You can check out a detailed due diligence checklist from VC-List here.

Knowing the Different Funding Rounds

Most startups will raise more than one round of funding. Each series round (from pre-seed to Series D and beyond) represents a different stage in a startup’s growth process as well as the type of investors and potential raise amounts. Not every startup will raise each of these rounds, but below is how they’re generally broken down.

Pre-Seed Round

Bootstrapping, or self-funding, can also be referred to as pre-seed funding. This is the stage where you’re getting your startup off the ground using your own money and resources; family and friends might also be pitching in to help fund the idea. You are likely doing research and product development at this stage, but how far you can grow at this stage of funding varies widely.

Although it may be tempting to ask for money as a favor, try to treat your family and friends who invest as you would a regular investor—polish up that pitch deck when you ask for funding, and provide regular updates on how your startup is doing after they’ve invested.

Seed Round

The seed round is when you’re starting to take off a bit more. Seed funding will likely get you through the early stages of product development and market research. Investors at this stage will need to have a high risk tolerance and might include angel investors, targeted funds, accelerators, and incubators.

Series A

At this stage of funding, you have developed your product, business model, and key team members, and you’re furthering development of your product and scaling your business. Series A rounds typically pull in investments from venture capitalists, accelerators, or super angel investors. To successfully raise funds at this point, you’ll likely be expected to use Generally Accepted Accounting Principles (GAAP) for your finances to get through the due diligence process.

Series B, C, D

The Series B raise helps a startup scale and grow. You’ll likely be pitching to venture capitalists and late-stage VC investors. Due diligence at this point will be rigorous, as it will continue to be for any future raises. As you move into Series C, D, and beyond, the funding rounds will fuel expansion, increased market share, possible acquisitions, and other big moves to continue to grow.

Refocusing After the Raise

After a successful funding round, the hard work isn’t done. You’ve likely spent time focused on funding instead of your core business functions, especially if you’re small and in the early stages of seed rounds. Once you’ve sealed the deal with your investors, it’s time to refocus and keep up the performance that attracted your investors.If you’d like to explore funding options with MicroVentures, visit our application page to learn more.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.