The startup funding process can be a daunting, complex task for entrepreneurs. Every stage of startup funding requires different goals and strategies to ensure successful fundraising. Knowing when it's time to move to the next round of funding, what goals you should set for your business at each point in the process and how to best prepare is key to finding investors who believe in your vision. It can take a startup years to move through the funding stages, so it's wise to use that time to prepare for due diligence and formulate a concrete plan for how you plan to use those prospective funds.
Fundraising is an intrinsic part of the startup lifestyle, but there is no one-size-fits-all solution to make the process easier. Because each startup has its own unique challenges and needs, the company's fundraising must adapt to each company’s specific circumstances. While some startups breeze through the different phases in a few months, others may take several years between rounds. Knowing whether your business is ready for the next stage of funding comes down to four concepts: your vision, your team, your customers and your revenue.
How to know it's time to move to the next fundraising phase
Vision
Your vision for your company, which includes your business model and plans for the future, must be clear, concise and effectively communicated to all involved parties. Explaining your vision to potential investors is obviously necessary, but have you also shared it with your employees? How about your community? Everyone should be aware of your company's goals and have some insight into how you plan to accomplish those goals, even if they don't have the full picture quite yet.
Team
To successfully scale operations, it's essential to have a team behind you that you can trust. Building a team is the first step, but as your business continues to grow, you may not be able to or even want to assume a managerial role over your growing staff.
Before you begin making plans to expand, complete a staffing review to ensure you've got enough employees to maintain operations on a larger scale while also considering potentially establishing a management team. It may not be feasible in the early stages of your company, but long-term planning for the future will help impress your potential investors.
Customers
How your customers react to your product or services determines your pace of growth. If demand is low and you're struggling to hold on to the customers you already have, this may be a time for you to focus on improving your product or customer relationships rather than expanding operations. Consider distributing a customer or product survey to determine your weaknesses and strengths and how you can improve.
Revenue
Some startups have experienced significant slowdowns between their seed stage and Series A. Investors at this level have become more hesitant to invest in startups because of the rising importance of profitability over growth potential. Previously, investors were happy to see proof of growth as a reason to invest in a startup but investors have grown much more discerning about how they allocate their resources.
Instead, investors have zeroed in on revenue and profit to help determine their likelihood of achieving a return on their investment. The further along a startup is in the funding process, the more selective their prospective investors become.
Exploring startup funding phases
To best understand whether your startup is ready for the next phase in the funding life cycle, review the different fundraising stages to help determine where your startup’s priorities and goals lie. There are currently multiple sources that provide averages of each phase’s fundraising amount, but below is what most are reporting:
Pre-seed
Average fundraising varies – This fundraising stage is also referred to as the bootstrapping phase. The main investors might be yourself, friends and family members. This is also considered the ideation phase when you begin developing a product or service, researching your target market and competitors, protecting your intellectual property, if applicable, and completing other foundational details.
There’s no hard and fast rule about how much a startup should raise in this phase. Generally, a startup should raise enough funds to remove enough of the risk in the business to attract investors. The timing here varies, so be sure to set specific goals for your company to reach before setting out to find a seed investor.
Seed
Average fundraising of $3.7 million – Once detailed plans for the startup have been established, including a comprehensive business model, it’s time to meet with outside investors. This may include angel investors eager to get behind a good idea on the ground floor, which is why developing your business plan in pre-seed was so important. Funding at this level can help startup founders hire additional employees and begin or expand production. This stage is critical for building a customer base and beginning to generate revenue.
Series A
Average fundraising of $19 million – Funding at this stage becomes increasingly driven by venture capital interests. Because there’s an increase in the levels of funding, Series A investors are highly motivated by profitability at this stage. As a result, your product and customer base need to prove that they’re capable of being scaled and you must present evidence of your company’s preparedness to take that next step.
As this is generally the first time a startup becomes involved in VC funds, the timing of your fundraising is important. You should begin seeking Series A rounds while you still have several months of runway left from the seed stage. Generally speaking, six to eight months of runway are recommended, but a trusted financial advisor familiar with your business’ circumstances can help you determine a timeline that works best for you.
You should also factor in time to account for VC due diligence processes. This will be more thorough and take longer at this stage than in previous phases. To help minimize the process, begin building relationships with potential investors early to establish yourself and your company in their minds. Monthly or quarterly updates through an email newsletter, for instance, can be one way to keep potential investors up to date on your startup’s latest accomplishments and goals.
Series B
Average fundraising of $46 million – This stage of funding provides startups with the additional capital they need to keep making progress on their growth trajectory. Series B funding can help startups experience significant bumps in revenue and an associated increase in profitability. These milestones can be achieved through further investment in a startup’s capabilities, such as hiring additional employees, launching new products or services and expanding into new markets.
As startups enter Series B rounds, securing funding from late-stage investors becomes more difficult. Your team and board may need even more time to pitch to current and prospective investors on your startup’s potential. It’s critical to ensure you have enough runway remaining from your Series A rounds to last until you can secure Series B funding. Consider fundraising when you still have about a year before you run out of funds.
Series C
Average fundraising of $60 million – Startups seeking additional funding to help support their ongoing growth and expansion efforts may continue their fundraising with Series C rounds. This includes efforts like entering new markets, acquiring other companies, investing in infrastructure or launching new products and services.
Startups entering Series C fundraising may have scores of employees and clients who depend on them for services or products, which is why cash flow management in this phase is so important. Give yourself at least a year to 14 months to pitch existing and new investors. Growth and revenue at this stage are vital signs to share with investors.
Series D
Average fundraising of over $100 million – A minority of startups seeking Series C funding go on to seek funding from a Series D round, usually only when presented with an opportunity to expand their operations, such as through acquiring another company.
Investors aren't just looking for great ideas. They want to see evidence that your business model is sound, that you have detailed plans for expanding your operations and you have a comprehensive strategy to deploy the funds you're requesting. Investors know it's a risk to fund a startup, so it's your responsibility to do what you can to reduce that risk and communicate that to your investors. Working with a team of trusted CPAs and advisors can help you identify these risks and formulate an action plan to bring your startup success.
Anders CPAs + Advisors works with startups and entrepreneurs on their financial needs so they can focus on what they do best. Learn more about the Anders startup group to discuss capital raising options for your startup.
Every day at Anders, we serve as a catalyst for those striving to achieve their highest potential and carry this mentality on to our clients and community. Through a collaborative approach and a combination of tax, audit and advisory services, we help our clients achieve their goals.
With a decade of experience at Anders, Josh Snyder has worked with startup companies, athletes and high net-worth individuals on strategic tax planning and compliance. As a tax senior manager, Snyder also co-leads the startup and entrepreneurial group. He particularly enjoys working on tax planning opportunities for both individual and business clients, especially in the initial years of startup companies.
