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The Startup Investment Process Breakdown – A Guide for Founders

Last updated: October 18, 2022
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In the beginning stages, the funding for building and managing a startup can only take you so far. It starts with an idea and then evolves into creating a prototype and developing a robust business plan for how you want to make it work. You do everything you can to get your startup to a point where it's a viable company, but eventually, you will run out of your initial funds. Whether it was your savings or borrowing money from friends and family, it's time to start looking for investors to help you grow your startup. 

 

When you are a new founder, the startup investment process can be overwhelming. There are series and rounds and a wide variety of investors and ways to get the funding you need. It can be hard to know where to start. Startups need financing to be able to keep the momentum and build their product or company. This guide will walk you through the startup investment process and give you all the tools you need to know to get started.

 

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    How Does the Startup Investment Funding Work?

     

    Most startups need external investments throughout the development of their company. When your startup reaches a point where you need to hire a team, invest in a prototype, and rent an office space. Your goal is to transform into a real functioning company. You need startup funding. Startups need to secure capital by considering outside investments by investors. The process is pretty straightforward, but it's important to have a general understanding of the steps involved before diving into the details.

     

    Many investors are looking for startups that align with their values, are in an industry of industry, and can potentially help them make a return on their investments. All investors exchange financial backing for equity in the company. When your startup begins to earn a profit, investors can get their initial funding back plus a profit for their risk.

     

    Startups that look for funding begin with a seed round before moving on to a Series, A, B, or C round. Before any startup funding rounds begin, a company needs to determine its valuation. The valuation looks at the company size, market, profit and risk, maturity of the startup, and more.

     

    Valuation

    During the startup investment process, you need to understand what your company should be valued at at every stage. To calculate a valuation, you need to look at other companies in your industry at the same stage. The valuation is the pre-money value of your company before the investors' money is made available to you.

     

    Term Sheet

    When working with investors, you will need to create a term sheet as the first essential document in the investing round. The term sheet defines the terms of the investment round. It includes details such as the size of the investment, the shares or equity to be given out, and other key details.

     

    The term sheet is not a contract and is not legally binding, but it indicates an investor is willing to invest during the specified investment round. The investment is only legally binding once the names have been added to the shareholder agreement and the actual investment agreement has been signed.

     

    Due Diligence

    Once the term sheets have been signed, investors rarely back out of the deals at this point. After the term sheets have been confirmed and signed, the next phase is the investor's due diligence. The investor reviews the company's details and ensures everything is in place.

     

    Shareholder Agreement

    The shareholder agreement is one of the most important documents for a startup. It contains information about who owns the company shares and what is required, including shareholders, investors, and any minority shareholders. The shareholder agreement should be looked over by a lawyer familiar with how startups work.

     

    The shareholder agreement can include shareholder classes, any future funding commitments, vesting conditions, investor protection clauses, shareholder commitments, transfer rights, and more. These documents are incredibly detailed and complex information. It's important to understand all the details to avoid any issues or surprises in the future.

     

    When startups are ready to start funding rounds, the timeline and entire process can vary. Depending on the type of investor you decide you'd prefer to work with and how well you put together a pitch deck. Some startup funding rounds can take months, while others can build capital much faster.

     

    What are the Different Types of Funding Rounds?

    Before you begin to seek capital, it's essential to understand the different types of funding rounds and what each of them means. 

     

    Pre-Seed Funding 

    – Pre-seed funding is a funding round that occurs in the very early stages of development. This round of funding usually involves receiving money from friends, family, supporters, and personal savings. This is when you might start developing a prototype and creating a business play.

     

    Seed Funding 

    – Seed funding is the first official funding raised by your startup. This funding round helps you start key elements of your business, such as market research, product development, building an audience, and generating excitement. You can start to hire a team to help you develop your company and help it grow, just as you would a planted seed. Seed funding can also come from friends, family, or from investor sources such as venture capitalists, angel investors, or through incubators.

     

    Series A Funding 

    – After your startup has developed a customer base, has built a strong foundation, and is running out of funds, it's time to jump into Series A funding. Series A funding is designed to help expand the company by developing a plan for growth through product enrichment or expansion and diving more into marketing to expand the existing customer base. Once you reach this round, you will be able to attract more serious investors willing to invest much more capital in your company's growth. You can show that your company has promise and has been trending with exponential growth.

     

    Series B Funding 

    – Series B is the funding round focused primarily on your business development and how to maximize your growth. This round of funding supports hiring new talent to support the new growth, marketing efforts, implementing and supporting new tech, and providing customer support.

     

    Series C Funding

    – For Series C, you will already have a well-established company, and it's time to consider the next big steps. Companies that enter Series C funding have a value of over $100 Million and are usually in one of the last funding stages. It's intended to extend current projects and create new products to further growth. Investors from earlier rounds begin to look towards their exit strategies during Series C and beyond.

     

    Initial Public Offering 

    – IPOs are a common exit strategy for investors that opens the company's stock up to the public to be traded. This opens up a larger amount of funding and a new level of transparency. It also adds a new level of complexity as you have to manage shareholders and your existing investors.

     

    Merger and Acquisition 

    – Great companies, are often purchased by their larger competitors and is a common exit strategy for many founders and is acceptable for investors. Investors can choose to exit or stay on during a merger or acquisition.

     

    Common Startup Funding Sources

    With a clear understanding of the startup funding rounds, you should clearly understand the investment types. There are a few major options to consider, as what works for one startup may not work for the other.

    • Boot Strapping – This is also referred to as self-funding. When you have the money in your savings to get started and cover your current needs, you pay for it until your money is gone.
    • Crowdfunding – Crowdfunding for startups has grown in popularity thanks to platforms such as Kickstarter and GoFundMe. With crowdfunding, you pitch your idea to the public in a captivating and appealing way and convince people to invest in your idea with a type of pre-order or incentive.
    • Business Loans – Plenty of small business loans are available to help build your company. These are usually more expensive options as you have to pay monthly payments with a large percentage of interest every month, and they are only good for short-term use.
    • Incubators and Accelerators – Incubators and accelerators are a great solution for startups to support small businesses as they develop their infrastructure in the early stages.
    • Venture Capital Firms – Venture capital firms are a resource that uses a collected pool of funds where professionals in any industry looking to invest in startups with big potential. VC investors usually prefer to invest in startups that show potential to grow rapidly, allowing them to make their money back plus profit within 3-5 years.

    While the startup investment process is complex, it's essential in order for you to see successful growth in your startup. By evaluating other businesses in your industry, you need to decide which funding source will work best for your needs. Every startup's journey is going to be unique. Prepare a solid business plan and pitch deck, and get yourself out there to build your startup.

     

    When you're ready to start on your journey to find the perfect investor, it can be overwhelming. Get the help you deserve to get your startup off the ground. Angel Match can match you with over 90,000 angel investors and venture capitalists in one place. Learn more about how Angel Match works here.