What to Know About Startup Financing Cycle

by Greg DePersio

2 min read

A critical element to starting and developing a business is gathering enough funds to finance operations. When starting out, this is vital in developing the company’s infrastructure. As your company grows, funds are also important to expand and further develop your business. Based on the age and market position of your company, different financing opportunities are available.

Early Financing

Early financing occurs when money is raised from individuals closest to the new owners. This stage is typically limited to the business owner, family, and friends. The raised money is attributed to startup costs, and the business operates at a loss during this period. In addition, minimal business analysis may have been conducted to this point. Therefore, early financing is sometimes referred to as funds raised from FFF — only family, friends, and fools would be willing to take on such a risky investment. Most, if not all, of the funds raised in this stage are called seed money, since the company is still in its infancy.

Valley of Death

The period that bridges early financers and strategic investors is called the valley of death. Typically, as a business begins operations, expenses are high and revenue is low. When the business raises more capital (typically from more serious investors), net income tends to level out. If the company is able to raise enough funds, net income becomes positive. This period gets its name because graphically, the net income trend of this period closely resembles a valley.

Development Stage

The development stage entails receiving finances from angel investors or strategic investors. These groups invest heavily in the infrastructure of a business. In return, these investors receive an ownership stake in the company. To raise money during the development stage, you typically must present business plans, product models, and market analysis to substantiate your company’s viability as an investment option. These type of investors actively seek high risk opportunities that can result in high rewards.

Startup Phase

Prior to starting business operations, an entity may pursue venture capital (VC) fundraising. This occurs when private investors inject capital into an entity in return for an equity stake. The intention of the first round of VC fundraising, also called Series A, is to continue to develop an infrastructure. It can also be used to scale sales and expand operations. Venture capitalists typically look for high growth opportunities, both in terms of total company revenue and company size.

Launch

Upon launch, a business may pursue additional VC rounds of financing. In addition, private asset management companies invest in companies through the rounds of VC fundraising. After the launch of a business, the entity is more likely to pursue Series B or Series C fundraising, or the second and third rounds of VC investments.

Exit Phase

The last major fundraising phase occurs when a business becomes public. Through an initial public offering (IPO), a business raises funds through the sale of stock. At this stage, a company is no longer private. It must meet multiple filing and reporting requirements to be listed on exchanges.

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