When starting a business, a lot of people struggle with finding the finances that are needed to push their business and help it grow. These five financing stages for a start-up business will walk you through the process of financially securing your business, making it grow and expand into a public company.
This is the earliest stage of your business start-up. Seed capital is a crucial source that includes channels you have relied upon since childhood like credit cards, your personal savings, crowdfunding, and so on. No matter what and who your source of money is, it will never be for free. What’s important is that your source clearly states and defines what the interest on their investment is from the very beginning. As for you, you will need to make sure to provide tangible deliverables as well as important milestones and update them on your progress frequently. At this early stage of a start-up most of the money goes to research and development for the initial product.
Angel Investor Funding
Over time, the needs of your start-up will start to grow, and there are two major strategies you could go for to help fund your business. You could:
- a) Increase the overall funding toward marketing and product development, or
- b) Expand your team in order to maintain the momentum (angel investors can be of great help here)
Also, if you plan on having your start-up raising money at this stage, you need to be able to prove your business model canvass.
Accredited angel investors are basically individuals who possess a net worth of about at least 1 million dollars. They usually have an annual income of approximately two hundred or even three hundred thousand with their spouse. The difference between these kinds of investors and other investment entities is that angel investors use their own money which should be treated as such. They can choose to invest individually or they can invest their money in a group. Also, remember that these investors will most definitely be expecting a well-researched and compelling pitch considering the fact that investments at this stage will be a lot higher than in the previous stage.
Venture Capital Financing
The next step is to get to the next level and expand your business with a little help from Venture Capital Financing. This is how you can get the necessary resources that will help you scale your business to the new customer segments and business channels. By doing so, you will also be able to increase your marketing efforts to make and additional customer acquisition.
Once you reach this stage, your start-up is either going to be profitable or it’s in a good position to benefit from offsetting the negative cash flow by using a new form of investment simultaneously as the company’s success grows bigger. There are multiple forms of funding that can occur at this stage. Not only that, but investors might also offer joining the team.
At this stage, you will probably get contacted by a lot of potential investors and be prepared to answer a bunch of questions (really, tons of them). That is why you need to be properly prepared and informed on commonly provided offers like equity, convertible notes, an d SAFE (Simple Agreement for Future Equity).
Mezzanine Financing & Bridge Loans
At the fourth stage your business has pretty much developed enough for you to provide commercially available products. Even if the start-up is not yet profitable, your revenue is most likely regularly coming in. All of the funds you manage to raise at this point will be going toward your business expansion to mergers, new markets, preparation for IPO, or acquisitions. At this stage, you can start looking for investors who offer commercial business loans to help you get to the next and final stage. These investors will be expecting to get a clear roadmap to the profit. Keep that in mind.
IPO (Initial Public Offering)
Lastly, this stage is optional, but a great addition to previous stages if you managed to raise money in all of them. In order to expand your business even more, you can decide to go public. In most cases, all of the investors who were included in the previous four stages will most likely recoup their investment with some additional profit. Many of them will probably retain the shares, but some may even try to sell their stock at the beginning to get some rewards for getting in early. The IPO can open doors to many new options. It will help your company attract top talent and it will provide you with the increased access to capital. This will only push your business even further into success.
These five stages are the five main financing stages of a start-up business. If you carefully go through all of them and know how to wisely pick your investors, your success is guaranteed.