Stages of Startup Funding
Starting a new SaaS company is exciting, but you will have a difficult time getting your product off the ground if you do not have enough runway. If you are curious about the types of startup funding, then you have come to the right place. As a SaaS company, funding is important because it can be used to build your team, grow your audience, and build your product.
If you are a business owner investigating the types of funding available for your business, then it is good to be familiar with the types of funding sources. There are numerous types of funding, including government loans, grants, venture firms, private investors, crowdfunding, and more. Below we highlight a few types of funding available for SaaS businesses.
Get Funding For Startup
The majority of entrepreneurs looking to kickstart their businesses grapple with how to get funding for a startup. Gaining access to the ideal early-stage funding for a venture can determine its growth prospects. Funding makes it easier to hire talented personnel and compete favorably in a given sector.
You need to identify the right funding sources before applying. Each option comes with specific requirements and limitations. Some of the popular startup financing options include:
- Small business loans
- Kickstarter crowdfunding
- Government grants
- Angel investors
- Incubators and accelerators
Many startups take advantage of small business loans to get the ball rolling. This option comes with pre-determined conditions and an attached interest rate. You can go for the loans if you have a sound credit record. It is vital to formulate a robust business plan before making the final decision.
Online platforms like Crunchbase provide a viable way to find the right investors. The resource allows you to search for active investors to suit specific funding and project requirements. It matches your startup with investors by location, exit count, and industry.
Crunchbase offers analytical features, which help you assess how similar startups perform in their quest for funding. Furthermore, you can benchmark your venture's metrics using the statistics feature. Doing so provides a surefire way to determine the ideal amount to raise via the platform. The site also provides access to in-depth guides on how to get investment for startup.
Raise Money for a Startup
Angel investors provide a lucrative solution to raising capital: get the money you need to grow your business. Some angels operate as a network of investors, which enables them to evaluate proposals as a collective. In some cases, the investors provide mentoring services alongside the cash injection.
Venture capitalists, on the other hand, provide operating capital to startups with promising business prospects. This option is a practical choice for small businesses with a viable product or service. These startup funding companies also prefer startups that have undergone ideation.
To raise money for startup, you can also consider government grants. This option differs from other funding sources because the funds are not loans. Hence, many startup entrepreneurs view government grants as free money.
The United States government provides detailed information about the grants via a dedicated online portal. You can take advantage of a comprehensive array of programs available to local businesses.
With incubators and accelerators, your startup benefits from operational support during the formative stages. The accelerator aspect enables your business to boost growth through targeted expansion measures. You need to commit to the programs, which can run for periods ranging between four and eight months.
Venture capital firms offer more than just capital to selected businesses. They can also help entrepreneurs find partners, clients, highly skilled employees, and much more. However, companies raising venture capital funding only make up about 0.05% of the total entrepreneurial market. Most entrepreneurs do not secure funding via this channel.
Hence, the need to familiarize yourself with the startup funding process used by venture capital companies. For this reason, take the time to visit the relevant startup funding website to learn more about the terms and conditions. Most VC firms focus on one or a few industries, companies in specific seed funding stages, or locations.
To increase the chances of approval, consider firms whose focus aligns with your startup and funding stage. Likewise, some VCs recommend entrepreneurs avoid sending unsolicited emails but rather introduce yourself via trusted third parties. Presenting viable elevator and investor pitches is another way to increase the chances of a successful application.
The venture process requires considerable patience due to the lengthy vetting steps and deliberations concerning the startup funding series. Organizing a meeting with VC principals can be time-consuming. You may wait for several weeks before the principal grants an appointment. You should expect several additional meetings before the presentation stage, which usually involves all VC fund partners.
Once the presentation phase is complete, a term sheet's negotiation and issuance is the next crucial step. VC analysts perform due diligence for several weeks or months before drafting and negotiation start. This process involves legal professionals from both sides. Once complete, you will receive a legal document outlining the terms and conditions of the investment.
The term sheet covers various aspects of the financing, including investors' post-closing rights, business valuation of your startup, the board's composition, and voting rights given to the investors. Although non-binding, the term sheet is an important document associated with the venture capital firm's investment in the startup funding rounds.
Countless prominent businesses benefited from the startup funding process offered by angels. These companies include Alibaba, Google, and Yahoo. Unlike venture capitalists, angel investors are generally willing to provide business finance in a company's early growth stages.
Depending on the funding agreement's terms and conditions, the investor may require equity of up to 30 percent. Financiers typically take more risk than venture capital (VC) firms for higher returns. On the contrary, VCs invest more money into businesses than angels.
The Angel Capital Association (ACA) urges entrepreneurs to partner with accredited investors. Doing so helps bring considerable value to the venture by mentoring business owners.
In many cases, angels invest in startups to give back to their community, generate some income, or help develop promising business ventures. These types of investors typically finance projects locally or regionally. For the best results, consider approaching angel investors once the product development is complete or near completion.
Angels are more likely to consider your proposals if you prove the existence of customers willing to buy from you. Ensure that your business plan is complete and ready for presentation.
In addition, you need to demonstrate the growth potential of your startup. Investors are sure to respond positively if you prove that the business can reach $50 million or more in sales over the next three to five years.
The best part about working with angels is that they have a risk appetite compared to venture capitalists. This aspect is what every angel investor wants you to know. For this reason, you can find it easier to secure funding with angels than with small business loan applications at banks and other financial institutions.
The majority of angels are entrepreneurs with a solid track record in business management. They understand the nature of risks associated with various types of business ventures. Banks often limit the loan amount if they perceive that your venture entails considerable risk.
Crowdfunding and Investment Sites
Crowdfunding has transformed the way many small businesses raise capital. This option is a convenient option that requires limited time and attention. Most entrepreneurs opt for this funding solution as it eliminates the need to repay the capital received. To reap the rewards of crowdfunding, you should put in the effort.
Investors on the best startup investment sites like Indiegogo and Kickstarter make pledges if you work tirelessly to convince them to invest. These sites manage the interactions between investors and entrepreneurs to facilitate positive outcomes. You will find four main types of crowdfunding websites. These include:
- Equity platforms
- Donation-based crowdfunding sites
- Lending platforms
- Rewards-based investment websites
Equity sites enable entrepreneurs to reward contributors with a stake in the business venture. As a result, all contributors become stakeholders, which may be unfavorable for some business owners. Meanwhile, donation-based platforms allow entrepreneurs to receive funds without giving away a stake in the business.
Lending-based investment sites provide access to affordable business loans. You need to repay the money, sometimes with an attached interest. Rewards-based sites allow entrepreneurs to offer rewards, such as free product samples, to people who pledge and contribute varying amounts towards business startup funding.
Government Grants for Startups
Although government grants for startups can be challenging to secure, they represent one of the best options available on the market. This type of funding enables you to develop and grow your venture without worrying about repayments. The money is not repayable, thus increasing your chance of success.
You can access different startup funding grants, including minority small business grants and small business hardship grants. There is no need to put up collateral or fret about interest or exorbitant fees. However, the government may attach terms and conditions with the grant to ensure that you spend money on specific projects only.
For instance, if you apply for grants for a small business startup to develop new software, you cannot divert the grant money to pay staff or use it for other business purposes. The government may force you to reimburse the free government money start business if you disregard this requirement. In the worst-case scenario, you may face legal ramifications due to the fraudulent activity.
Additionally, when you get funding for startup via this channel, you may be required to meet specific accounting and reporting guidelines. Some of the business types that qualify for startup grants include rural businesses, innovators, and green ventures. The government usually focuses on startups operated by veterans, women, and minority-owned ventures.
Startup Funding Books and Articles
Raising capital for a startup can be a daunting but rewarding experience for entrepreneurs. Many successful business owners prepared for their fundraising efforts by learning about the process not only through entrepreneurs who have done it before, but also startup funding books and articles.
Some of the best articles and books include:
- The 10 Most Reliable Ways to Fund a Startup – offers insights on viable ways to finance your business.
- The Art of Startup Fundraising – this book takes a fresh look at strategies needed to succeed when sourcing startup funding. The publication is a comprehensive resource that provides expert guidance.
- How to Get Funding for Your Startup Book – guides you on proven ways to source, vet, and close funding deals with the right investors.
- The Startup Game: Inside the Partnership Between Venture Capitalists and Entrepreneurs – this book offers a glimpse into the relationship between entrepreneurs and venture capitalists. It outlines the importance of the relationship to the economy.
- Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist – outlines the venture capital funding process in detail and incorporates effective fundraising strategies for entrepreneurs.
Types of Funding for Businesses (continued)
There are several types of funding available for SaaS companies. Like we called out before, you need to identify the right funding sources before applying. Each option comes with specific requirements and limitations.
For example, you may go to a traditional bank and apply for a loan. They usually have numerous financing options that can help founders get their companies started.
Private investors are another option for startup funding. They are typically high-net-worth individuals who seek to invest at the early stages of a startup company. You might also consider crowdfunding using a tool like Republic.co.
Venture capital firms might also be willing to provide startup funding if they see an opportunity for a return in their investment. Venture capital firms are usually run by a handful of limited partners who offer funding in exchange for equity in the company.
Funding through venture firms is associated with multiple funding rounds. The first stage is called pre-seed funding. If you’re just getting your company off the ground and investing pre-seed funding, you might be asking yourself, “what is preseed funding used for?” Pre-seed financing is used to explore the feasibility of taking an idea and turning it into a product or service.
The next stage is called seed funding, which is where the company targets angel investors and early-stage venture capital firms to help them scale and gain traction based on the viability from early revenue. Seed funding can help a company gain traction in a tough market. After Seed rounds, additional financing rounds are categorized in alphabetical order (e.g., series A, B, and C funding, etc.)
But there are other options available as well. You can also work with a venture studio, like High Alpha. A venture studio business model, which is also called a startup studio business model, is a company that works to build several different companies in rapid succession. They usually come with not only their money but also their expertise. Venture studios have a lot of experience building new companies and can apply this experience to achieve a greater chance of success.
Here at High Alpha, we invest in both High Alpha Studio companies and outside entrepreneurs building B2B SaaS companies. Our team brings an experienced SaaS operating voice and has built a unique platform to help our portfolio grow and scale.
Stages of Funding
If you are curious about the various stages of funding, then it may be helpful to take a look at a list of startup funding stages explained. That way, you can figure out where your company is in the process, where your money should be going, and how it might help you get your company off the ground.
A few examples of the most important funding stages include:
- Preseed Funding: Pre-seed funding for startups is early-stage financing round when investors (e.g., early-stage venture funds, startup studios) provide a business with capital to develop their product in return for equity in the business. According to Hubspot, the average amount raised in the U.S. during a pre-seed round sits just above $500,000.
- Seed Funding: A seed round is one of the earliest stages of the capital-raising process of a startup. This also happens at a very early stage in the startup’s lifecycle in exchange for equity before the business. According to Investopedia, these rounds produce anywhere from $10,000 up to $2M for the startup.
- Series A, B, C Funding: The Series A round is typically the first significant round of venture funding. During the Series A and other following consecutive rounds (Series B, Series C, etc), a startup provides venture investors the opportunity to invest cash in their growing startup in exchange for equity or partial ownership.
After that, consecutive rounds may follow, including Series D funding, Series E funding, and Series F funding. All of these rounds of funding are designed to help companies raise more money to expand operations and scale.
How To Get Seed Funding
If you are wondering how to get seed funding, then it is important to take a closer look at the difference between preseed funding vs seed funding. While both rounds of funding are important, it is critical to understand how this money is raised and how it should be used.
You may be asking yourself, “What is preseed funding used for?” It is usually raised by a company that has a viable idea, but has not yet created a physical product or service. The money is typically used to help a startup company get off the ground, including building the product and finding their first few customers. In a lot of cases, a company will receive money from investors in exchange for some amount of equity in the company.
In contrast, seed funding is usually financing at the building stage for a Saas company. The goal of seed funding is to help a startup company finance its initial beginnings. This round is specifically designed to grow the business. At this stage, you may have a prototype that works. You may also have a small amount of revenue, and you may have the bones to a business strategy to help you grow quickly. These funds might be used for product development, market research, and marketing to help the company expand its roots.
Online platforms like Crunchbase provide a great way to find the right investors for your seed round. This site is a resource that allows you to search for active investors to suit specific funding and project requirements. It matches your startup with investors by location, exit count, and industry. Doing so provides a surefire way to determine the ideal amount to raise via the platform. The site also provides access to in-depth guides on how to get investment for startup.
Startup Stages of Development
There are several startup stages of development, and it is critical to be familiar with the different stages of business development funding. It is often helpful to break this down into the four stages of startup development. These four stages include:
- The Idea Stage: During the idea stage, the founder might still be working along or there might be a small team. There could be an idea, but it is not yet concrete.
- The Seed Stage: During the seed stage, there is a prototype that is working well. The team is trying to iron out some kinks, and they might be raising money to build the bones of their product.
- The Early Stage: During the early stage, the product is a solid fit for the market and there is revenue coming in. The customer base is expanding and the company is working on generating repeat customers. This can sometimes be called the validation stage startup as well.
- The Growth Stage: During the growth stage, revenue is growing quickly and the goal is to scale the business. The company is likely trying to hire more staff to keep up with demand.
Sign Up For Our Monthly Newsletter
Founder Stories: Connor Kelley, CEO of Flaunt
Flaunt is revolutionizing digital loyalty programs. Listen to Flaunt CEO Connor Kelley's story, and how he partnered with High Alpha to move fast.
Inside High Alpha: Our Blueprint for Building and Retaining World-Class Teams
I sat down with High Alpha's Director of Talent to learn how the HR and Talent team supports founders and the importance of building an elite team from the get-go.
Inside High Alpha: Strategic Financial Guidance for Founders
I sat down with High Alpha's Chief Financial Officer to learn how the Finance team supports founders and why early-stage companies should invest in strategic financial resources.