When internal resources are insufficient, entrepreneurs are faced with the need to attract external capital to start and grow their businesses. This article will explain where to look for investors and how to use funding opportunities for startup development properly.
Basic stages of the startup development
About 90% of startups fail due to a wrong business model, inefficient investment allocation, legal errors, or high competition. They are looking for an attractive business model, while companies already have it and are focused on its successful implementation.
Each startup goes through several stages before entering the market. However, in some cases, the author of the idea may deliberately skip several stages if the situation allows. The main thing is to determine what will happen to the startup after it attracts investments before the launch. It could be going into a traditional business, selling it, or launching it on the stock market. Such information is critical for potential investors to understand the risks and return on investment.
There are several main stages that a startup goes through:
- Idea. The concept of the project is being worked out: how clear it is and how it will work. Social projects have a peculiarity: they appear not to make money but to solve a specific social problem. At this stage, the very first funding.
- Prototype stage. At this stage, the entrepreneur is trying to launch the idea, at least in some form. At this stage, business angels appear – people who give money simply because they believe in the team and the idea.
- Startup stage. After the prototype had been worked out, the first commercial clients appeared with their own identities. It may take several months. At this stage, venture financing is attracted.
- Development. You can increase the volume and scale when the startup hypotheses are confirmed. Money is invested in marketing, and due to the large flow of customers, the startup starts earning. At this moment, a break-even point arises – a startup has learned to earn more than it spends.
Startup authors seek funds on specialized platforms, forums, investment competitions, and corporate accelerators. Some launch projects with capital already, but there are also startups without a budget. Investors usually sell their shares in a successful startup or keep them for a stable passive income. The parties agree on the division of profits in advance. At the same time, the investor’s share sometimes makes up a large part of the income, and the percentage of the creator does not exceed 10%. In this case, a virtual data room can organize secure collaboration and file-sharing between the company and investors.
Every startup usually goes through several stages of financing:
- Pre-seed. The project exists at the idea level, and the development of the prototype is just being prepared.
- Seed (seed round). The round is considered the most difficult and can last more than a year. At this stage, the business model is tested.
- Round A. A startup becomes a company with a working business model, team, and clients. The company attracts direct investors.
- Round B. If the company has not yet started earning on its own, it needs to continue raising funds for scaling. At this stage, she will need several business angels or participating funds.
- IPO. The final stage of startup development. The company enters the stock market and begins the initial sale of shares. The list of potential investors expands dramatically, and the business receives a status that allows it to grow and develop further.