Building a business from scratch is no easy feat. The very first step is to identify a problem and bring a solution, one that has a base audience you can target. But even the most innovative ideas can't be brought to completion until you secure funding for your startup.
The exact cost of any startup will vary from one business to the next. Without any funding available to support your business in its early stages, you will not be able to fulfill your operational costs. Resultantly, you will have to abandon your startup entirely.
In fact, lack of financing is what led to [47%](https://www.cnbc.com/2023/01/20/top-reasons-why-startups-failed-in-2022-study.html#:~:text=Lack of financing or investors,was behind 44%25 of failures.) of startup failures last year. If you are heading a new startup, you should know about the various startup funding stages.
The very first stage of funding for any business is the pre-seed funding stage. This is the phase at which the company is steadily establishing its roots.
During this stage, the business owner should critically evaluate the business idea they are pursuing, whether it is viable and profitable, how much it will cost, and whether they have a sound business plan in place. It is crucial to have a clear understanding of the market, target demographics, and competition.
Moreover, an entrepreneur in the pre-seed stage must start thinking about the long-term sustainability of the business. This involves conducting market research, analyzing trends, and identifying potential gaps in the market that the company can fill. The business owner should also consider the legal and regulatory requirements for the industry in which they plan to operate.
Most of the funding in this stage is secured from close relatives, family members, and friends and by networking through trusted contacts. However, an entrepreneur in the pre-seed stage must also be prepared to pitch their business idea to angel investors or venture capitalists who may be interested in investing in the company. Funds gathered in this stage are used to set up the business hierarchy, place management, hire employees, and test the business model. The pre-seed funding amount for companies can range anywhere from $100,000 to $1,000,000.
Overall, the pre-seed funding stage is a critical phase in the journey of a startup. It lays the foundation for the company's success and prepares the entrepreneur for the challenges ahead. A well-executed pre-seed funding stage can help the business secure future funding and ensure its long-term viability.
The next stage after the pre-seed funding stage is the seed funding stage. This is the stage where you truly begin to build your business. At this stage, the focus is on creating a solid foundation for your business to grow and thrive.
Passing the pre-seed funding stage is the equivalent of proving that your idea is something people are willing to invest in. It's important to note that this stage is not just about proving that your idea is viable, but also about showing potential investors that you have what it takes to turn that idea into a successful business.
Proving that your business idea has the potential to grow will bring in a new round of investors; this is when you can have your “official” fundraising sessions. Potential investors at this stage include friends, family, founding members, incubators, venture capital companies, and angel investors.
Angel investors, in particular, are individuals with high net worth who find it feasible to invest in even the new promising startups in exchange for a piece of the business, usually in the form of equity. They are often willing to take on more risk than other investors, but they also expect a higher potential return on their investment.
By this stage, you should already have a functional product or service ready, but it's important to focus on continuous improvement. You should have a proven customer base that readily uses your product and likes the services you offer. This is also the time to start building a strong brand presence and establishing yourself as a leader in your industry.
In addition, you should have a reliable team set up. Your team should be made up of individuals who are passionate about your business and who have the skills and experience necessary to help your business grow. Some companies may even start turning over small amounts of revenue, but it's important to remember that this is not the main focus at this stage.
Most seed rounds today amount from $1M to $4M, so it's important to have a solid plan in place for how you will use the funding you receive. This is a critical stage in the growth of your business, and it's important to approach it with a clear understanding of your goals and a well-thought-out plan for achieving them. Consider seeking assistance from professional business plan writing services to ensure your plan is comprehensive and effective.
The next stage after seed funding is the Series A funding stage. In this period, preferred stock is sold to investors who wish to be more involved in the business’s development. Shares of the company are often offered in exchange for capital.