Overview of Funding Stages
The defining characteristic that distinguishes a startup venture from a lifestyle (or small business) business is the growth-based nature of the venture. Both ventures generally begin with personal, friend, or family financing. A non-growth-based venture must achieve sustainability within the confines of personal funds and debt arrangements secured by personal assets. Growth-based ventures, on the other hand, are susceptible of outside equity funding. To achieve the desired growth, equity funding is indispensable. In some cases the business will generate sufficient revenue to grow without outside funding, but this situation is the exception rather than the rule. Startup founders will thus seek investment capital to use to achieve growth. This financing often comes in stages and covers the working necessary to either achieve sustainability from revenue or arriving at the next round of equity funding.
Personal, Friends and Family Funding
The initial funding for a startup venture comes from the founders, friends or family members. See our Sources of Business Funds section for more on this topic.
Seed Stage Financing
A seed stage of financing is the earliest round of equity financing from someone other than founders, friends, or family. Seed stage financing takes place when the entrepreneur has demonstrated product-market fit (or service/content-market fit). Normally this takes place when a business has a valuation of between $100,000 – 2,000,000. The business valuation will vary greatly between types of business and market. In any event, funding at this stage of development generally comes from angel investors who are interested in early-stage ventures.
Growth-stage financing happens once the business has a proven business model. That is, the business has achieved product-market fit and now has stable revenue and growth metrics. Businesses in this category generally have a valuation of between $1-10 million (depending upon the nature of the business and market). At this stage, the primary investors are venture capital funds.