There is no set formula for financing a startup. The number of investors, amounts raised, time between rounds and number of rounds will vary from company to company depending a variety of factors influencing the stages of startup investment of a Startup, including industry, market, macroeconomic environment, existing investors, and investment terms. This presentation is about the four stages (Pre-Seed / Ideation, Seed, Growth and Later Stage which a start-up passes through as it raises capital towards a Liquidity Event.

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Startup Investment Stages
by
TD

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The Startup Investment Landscape

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Startup Investment Stages
• There is no set formula for financing a startup. The number
of investors, amounts raised, time between rounds and
number of rounds will vary from company to company.
• This will depend on a variety of factors influencing the
stages of startup investment of a Startup, including industry,
market, macroeconomic environment, existing investors,
and investment terms.
• Generally a start-up will pass through five stages as it raises
capital:
1. Pre-Seed / Ideation Stage
2. Seed / Startup Stage
3. Growth Stage
4. Later Stage
5. Liquidity Event

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Startup Investment Rounds
• Pre-Seed/Seed
• Founders, Friends, Family
& Fans
• Early Stage (first outside
money)
• Angel, Early VC
• Series A, B, -Z
(professional money)
• VC, Strategic PE
• Starting a Round
• Lead Investor
• Term Sheet

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Pre-Seed / Ideation Stage
• During the initial period, the development of the idea and
supporting business plan are funded through
bootstrapping or from the founders friends, family and fans
(FFF).
• Bootstrapping is when co-founders fund the startup with their own
personal resources. The benefit of bootstrapping is that the co-
founders maintain 100% control of the startup company. For most
entrepreneurs though, the money available is never sufficient to
bootstrap for long.
• Friends, Family & Fans (FFF) rounds are funds provided by people
that are not in the founding team, but know them personally. While
these investors may be seasoned, often they are not, and are just
helping out a loved one with the initial cash injection needed to see
their idea to fruition. The funds can be provided as debt (a loan that
is repaid as per agreed terms), but is also often done as equity
(whereby the investor is given a percentage of the company in
exchange for the capital).

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Seed Stage
• As the startup’s business idea starts to take shape, more funding may be needed to complete a
minimum viable product (MVP), build out a team and support operations. As a new business,
commercial loans are very difficult to obtain. Friends and family may have a bit more to invest in
the business, but typically the equity funding starts to come from third party investors, such as
business angels or Venture Capital firms that specialize in investing at the seed stage.
• Angel investors are typically wealthy individuals who dedicate some of their money to investing in
promising new ventures. In many cases, they are successful business people in their own right, have
valuable expertise and business networks to contribute in addition to their capital. Angels invest either as
individuals or in groups / syndicates.
• Early-stage Venture Capital is an alternate source of seed funding. Many venture capital firms, usually
those with smaller funds, now specialize in investing at this earlier, riskier stage. Benefits of early-stage
investment by a venture capital include access to the networks and know-how of the professional VC
firms, as well as the possibility for follow-on investing and/or easier access to other VC firms for the next
rounds of investing. However, their rigorous and time consuming due diligence process before a deal
can be agreed, and requirement to hand over some control of the company (VC firms, who are investing
the funds of their Limited Partners rather than their own, tend to want greater control to minimize the risk
of their investment) can be a downside for startup founders..
• While the need for capital to keep growing the business feels urgent and founders are often
tempted to take whatever money comes their way, selecting the right investors at the seed
stage is critical to the success of the startup. Beyond providing funds, investors at this stage
typically bring a lot more to the table in terms of expertise, advice, network connections and
business acumen. They tend to play a more active role in the startups business than later stage
investors do.

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Growth Stage
• Once the startups business’ concept has been proven with a steady stream
of customers, it will need its next capital injection to ramp up production,
marketing and hiring. While there may be limited revenue at this point, the
business plan has been developed to a point where the product/market fit
(PMF), size of the market and revenue projections are clearly
communicable to potential investors (and backed by solid proof points).
• The first round at this stage is called the Series A round. It is the first significant round of
funding raised from institutional investors, typically Venture Capital – either traditional
Venture Capital firms, or Corporate Venture (the VC arms of large corporations).
Investors from previous rounds, such as angels, may invest but usually are providing a
small proportion of the funds, and therefore have little weight in setting the terms for the
round. The amount raised at this stage will vary based on the industry and market, but are
typically in the millions of dollars.
• If further capital is required to scale up the business, a second venture capital series may
be required during this growth stage. By this point in the company’s development, there is
usually a clear business model and traction in the market. Further capital is used to
accelerate the scaling . This second round is known as Series B and investors from the
Series A round may participate in the Series B while other Venture Capital firms or
Corporate VCs will come into deals at this more mature Series B stage.

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Later Stage
• Some startups will require further rounds to provide additional
operating capital to achieve profitability, continue expansion into
new markets, finance an acquisition or even prepare it for a
liquidity event (acquisition or IPO).
• These are known as Series C, Series D, and so on. At this stage, other
institutional investors such as investment banks and private equity firms
start to be the larger player in the rounds.
• Typically, the company will be valued at a higher valuation with
each subsequent round of institutional financing. If the company
is overvalued too soon in the process, they may not be able to
continue increasing their valuation and may have the challenge of
raising a “down round”.
• While down rounds can bring in much-needed cash that can give
a startup a lifeline find a business model or turn things around
they create complications for both past and future investors as
they are one of the most demoralizing things that can happen to
a startup.

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Liquidity Event
• What all investors hope to achieve is a profitable
liquidity event which can happen either through the
sale of the company (acquisition) or through taking the
company public (Initial Public Offering, or IPO).
• This “exit” is when those with equity positions will be able to
cash them out and ideally receive returns well above their
investment.
• The alternative ending is the dissolution of the
company, which usually results in all parties losing
most, if not all, of their investments.
• This, unfortunately, is the outcome for the majority of startups
so sophisticated investors invest in several companies,
knowing that most of their investments will go bust, but that
one very successful exit can reap significant enough returns
to justify losses in their portfolio.

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Thank You!
Get in touch!
TomiDee TomiDee@TomiDee
td@tomidavies.com
tomidavies.com