The startup and business angel investment world is awash with phrases describing the stage of a business startup and the stage at which investment is made – concept, prototype, seed funding, crowd funding, series A funding, series B funding etc…
… so how do we tell a startup’s stage of growth and the stage of funding? Here’s iBusinessAngel’s attempt to shed some light…
Startups may be at any of the following stages
1. Concept (usually without funding) – an idea that has been sketched out on paper or digitally, but is not a functioning product and has not been market tested in practise – albeit, it will be based on insight that result from conversations with potential customers. Many businesses on crowdfunding sites are at the very early stage.
2. Prototype (possibly with seed funding)– an idea that has been developed into a functioning product that can be placed in front of customer
3. Early revenue (possibly with seed funding) – once a business has revenue it has a choice. Keep its costs at nearly zero (ie don’t pay founders and partners) in order to keep equity within the core team, or take funding to grow faster by allowing partners to release more time onto the startup project.
4. Seed funding – typically a £50k+ size funding provided by business angels and pre-profit. The funding is required to move the business into a breakeven position (ie no profit – just survival). Sometimes there is a recognition that £200k might be required take the business to breakeven, but that the investor only makes an initial £50k investment. It is important to see additional funding as part of this same stage – not a new stage.
5. Revenue and profit Growth (possibly with series A funding) – increasing revenue and establishment of profit, ‘Growth’ or series A funding is required to grow faster – typically in response to competitor threat or a belief that there is a land grab for market share. Often, this stage is illusionary in a digital or software business which explains why it occurs less and less often and most VCs are either dipping into the seed funding stage of the business angels (perhaps co-investing) or moving out to the Series B funding stage.
6. Business expansion (possibly with series B funding) – typically taking the business model to new geographic regions – perhaps taking a successful UK model and expanding across English speaking countries with country managers and businesses in each country. This is where businesses raise money in the millions of dollars or pounds and aims to become a multi-national with a few years.
Often, at the third stage, early revenue, the business will take a path of external investment or will remain an entirely private business.
Of course, skipping the seed funding stage doesn’t deny the option of attracting series A or series B funding, but conversely, if a business takes on seed funding it will almost certainly need either a series A or B (or both) funding round.
The element that often gets overlooked – by entrepreneurs – is that concept and proto-type business are rarely suitable for seed funding – except in certain exceptional funding markets such as Silicon Valley. In the UK, for instance, business angels will very rarely back a business that has no revenue what so ever.
Equally, the number of startups actually achieving an initial revenue income are pretty rare too – so if you can do it, have a quality team and a clear business model in an exciting / high growth area, then funding will be possible. The only question will be whether the various parties can agree terms.