Business funding refers to the process of obtaining financial resources or capital to start, operate, or expand a business. This funding can come from various sources, including banks, investors, venture capitalists, government programs, and other organizations.
Starting a business is costly, and most of the time someone opens up a new business, they have to secure the funds through someone else. Fundraising is a very common business process where investors can get into a business early and decide various aspects such as time to market, division of shares, board seats and votes, etc.
In addition, not all businesses are there to make profits. They make money, yes, but a common modern style of doing business is to spend as much money as possible early on to secure market share, even if you are essentially losing money for years and years. Uber and Doordash are common examples of this. These businesses need to consistently secure business funding services through a series of funding rounds, which we will elaborate on here.
Business Funding Series
Business funding rounds are not a one-off thing. A company that raises funds once—especially a tech company—might need more money again. Operating costs can be high early on, as companies strive to secure a market share in a place where their name isn’t known by anyone, and it can be difficult to even launch a product on time, let alone generate a profit. That is where funding rounds come in.
There are several funding rounds that occur for businesses, especially now, where they heavily rely on investors for getting any money at all. Most of the time, a new company will look for Venture Capitalists (VCs), which are firms that specifically invest in companies in exchange for a stake in their shares as well as seats on the board. This gives them more say in how to ensure that their investment generates a return.
The funding is typically provided by two types of investors:
Angel Investors
Angel investors are high-net-worth individuals who have plenty of their own money to be able to invest in the startup. They are taking more risks, but that is a decision that they can make on their own.
Venture Capitalists
VCs are somewhat different from angel investors, as VCs are not investing their own money. They are firms that invest other people’s money in businesses to generate a profit, so there needs to be enough guarantee that the startups generate a profit.
Now let’s take a look at the various funding rounds.
Seed Round
A seed round typically occurs at the very start, often before a company is even at the point where a VC can invest in them. This is the idea stage, where a person or group of people might look for an investor to secure ‘seed funding.’ Similar to how VCs operate, this investor provides seed capital early on in exchange for a stake in the company. Usually, at this point, the company has not been formed or launched yet.
Angel Round
For some companies, a seed round and an angel round can be one and the same, but it is not necessary. An angel round is where the angel investors come in. It’s different from a seed round in some ways, though business funding rounds often employ a mix of the two.
Consider a startup company with an idea. At the very start, the idea alone won’t be worth any money. However, once a company secures some seed capital, it might be able to develop that idea into something, a product, a service, software, etc. Before launch, they can take it to investors, who can look into the idea and determine its future value.
When looking for angel investors, there would typically be a prototype ready to show to investors. This is because, at this stage, the startup might not be able to make money, but the idea has progressed to the point that it could result in the future.
Risk is high at this point, and while some investors or VCs that see plenty of future potential might offer large sums in exchange for large stakes, others might only offer small amounts in exchange for 1 or 2% of the company’s stake.
Series A Funding
The seed funding and angel funding rounds are meant to support the startup in developing its idea into a working product. However, the series A round is to provide enough investment that they can operate to generate a profit. In this round, the startup will typically require a business plan to make a profit or at least generate enough revenue.
Here, the personnel has to be in place, and there have to be customer acquisition strategies, business scaling plans and potential, product research, and understanding completed, just to name a few factors.
Series B Funding
During this round, the risk is supposed to be lower, with signs of the company growing and performing well, resulting in a much higher value. Here, users, the product, and revenue should all be growing at a steady pace.
Series C Funding
A series C round is not just to grow but expand at a much more rapid pace. Here, the company might have enough capital to be able to acquire other businesses, have a significant market share with a plan to expand it and scale up with new ideas, products, or services.
This round usually comes before the IPO or initial public offering, which is when a company—and its stock, go public.
Type of Stocks Offered to Investors
Before we talk about IPOs, let us first talk about stocks. When a startup provides its shares in stocks to the earliest of investors, some of those shares might also go to employees. However, that does not mean those employees get a voting seat on the board. This difference is decided through common versus preferred stock.
Preferred stock is what is given or sold to investors and employees who get no voting rights. However, this is because preferred stock gets a preference for dividend payments over common stock. It allows a company to sell shares to investors while only having a few people on the board of directors.
Conclusion
Those are the most common business funding rounds, though that does not mean more investing rounds don’t happen. Lyft, for example, has raised almost $5B in funding over more than two dozen rounds, which can happen well after an IPO. Overall, investment depends on the risk, growth potential, and current success of the business.
