Is your venture ready for funding?
If you are an entrepreneur, you are likely wondering when a venture is ready for first funding. Notice how we have used the word first here? This is because 90% of start-ups will seek venture-style capital. It is common for a high-growth company to go through three or more rounds of capital. The average is $4.5M in 3.4 years to reach exit velocity. This is why we insist on seeing a capital plan in financial projections. We want to understand the effect of dilution on our future holdings and model the effects of runaway success and missed milestones.
There are several types of funding available, and which type of funding is right for you depends on the growth stage of your business. So, let us dive into each stage and take a deeper look at what capital might be the right fit for you.
CONCEPT
The company has been founded, and you have found a focused team ready to get started. You are working on the formation of the company identity, market research, filing your patents and identifying your customers while building a complete business plan.
Investment at this stage is cobbled together from business accelerators or incubator programs, product-based crowdfunding, and friends and family funding. This is best for businesses that need between $15k to $100k with valuations between $250k - $1M depending on IP, market segment, your “track record,” and the competitive landscape. At this stage, founders should also have put in their own funding to show dedication to the project.
SEED
Your company has pulled together, and you are ready to begin product development! You have created a dedicated team of capable professionals, and you have begun your product prototype and beta testing and have begun to secure your IP. Now it is time to identify your early adopters and audience!
Investment at this stage still includes accelerators but can also engage the product and equity-focused investors. This is the perfect stage to begin to pursue Angel funding. A typical capital round for a Seed stage company is between $500k and $1.5M with valuations from $1.5M - $4.5M.
START UP
Are you a true start up? You have everything running and your team is focused on product-market fit, executing your business plan and to-market strategy, gaining traction, and generating excitement along the way. You have got a final product developed, you are launching, or you have already got early sales that prove your idea works!
Investment at this stage might include Angels and Angel Groups, equity-based investors, and even early-stage Venture Capital (although this last one can be rare). You need between $1M - $2.5M and your valuation is $2.5M - $6M.
GROWTH
If your business is in the growth stage of development, you are focused on marketing, sales, and product evaluation. You want to prove that your business model is repeatable and profitable, and you have results/numbers to show the true potential of the business to investors.
Investment at this stage might include follow-on commitments from Angel Groups or Angel investors, equity-based investors, Venture Capital, and RegA+ options. You are seeking upwards of $3M - $5M and your valuation is sitting in the $10M - $20M range.
SCALING
Ready to scale? A step beyond growth, scaling is the stage at which businesses prove the stickiness of their ideas by focusing on market traction in order to reach “exit velocity.” You should be focused on the acquisition of your company by a larger competitor or industry leader—and be actively working towards making those connections.
Investment at this stage is through Venture Capital and Private Equity. You are seeking $15M to $50M and have valuations in the $25M - $100M+ range.
EXIT
You do not need any more funding: you have hit the big time! If your business is ready to pursue an exit strategy, then you have an acquisition lined up and ready to go. Declare victory—you did it! Time to celebrate!
These are approximated stages of capital investment for most of the United States—clearly, there are areas where these stages do not apply (Silicon Valley, Boston, NYC), and these steps do not often apply to biotech companies, which often seek additional testing or clearance from the FDA (Food and Drug Administration).
In general, you should expect to give up 10% - 40% of your company for each round of funding, and your founders and option holders will control about 10-40% of the company at the time of exit. The longer you go without outside funding, the less dilution your team and founders will endure—a critical thing to understand as an entrepreneur. Investors expect a premium for the risk they are taking in startups—this is why non-convertible venture debt is almost non-existent.