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Unless you’re already a multi-millionaire (or billionaire), it's vital that your new business secures seed funding and raises money to accelerate growth. Most of the questions we hear surround what that process looks like and how it actually works. In what follows, you'll see a very clear picture of what actually happens behind the scenes for a startup that secures and receives seed funding.
Everything starts with an idea, right? Long-term success, initial seed funding, and catching the eye of venture capitalists depends on several factors. These include the drive and vision of the individual introducing the idea, the resources necessary to make it into a reality, and the niche it fits into. Some early startups choose to fund themselves from their own capital by “bootstrapping”, with the hope that they’ll receive more funding once their company is established. Others simply don’t have access to as many resources, which is where investors come in.
In essence, anytime you accept funding from an outside source, you’re offering a slice of your company in exchange - you’re offering equity. Many funded companies know this well, as they offer shares of their project in the early stages in order to bring their vision to life. It can seem discouraging to be “giving up” parts of your company at first, but the bigger your company gets, the more valuable each share becomes — which means it makes sense to seek the support of investors. However, it’s helpful to be as resourceful and discretionary as possible when it comes to investment — you don’t want to end up owning the least amount of equity in the idea you originally came up with. Although your company will grow, the less you own, the less control you have over the direction it takes.
Investors accrue in stages or rounds, so it may take raising several rounds before a funded company has enough resources to implement their idea. Initially, there may be the founder functioning alone, who then opens up the opportunity to a trusted friend or colleague, a co-founder. The business is then typically split 50/50 and the founder receives an equity investment in return. There are a few approaches outside of that, separated into rounds. Sometimes an angel investors round (the founder’s family, friends, and wealthy donors or entrepreneurs) doubles as the seed funding round. Hopefully, this is then followed by venture capitalists investing.
The venture capitalist round can be split into several series. “Series A Funding” refers to any company’s first significant round working with VC’s. It’s followed by, “Series B” which refers to the series occurring after the business has made significant progress or gained a strong foothold in the market. Once a company has proved it can successfully compete in the market — it looks to develop more products with a higher market share. It can then be prepared for an IPO, assuming the company wants to go public. It also serves to further legitimize your business in the eyes of the government, implying your company is “safe” for the public to invest in.
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