Stages of Startup & Funding
Startup founders spend significant time and resources trying to raise money. Many will likely raise many rounds of funding from many different sources, and angel investors are one among them. The nature of investors, investments and terms may vary at startup stages and for each round. Each round will impact the previous rounds. A startup may not go through all of the stages, and it is also possible that they will do multiple rounds of investments in any one stage. Your objective as an angel investor shall be to get an exit, to realize a sizable return on your investment.
BOOTSTRAPPING
Bootstrapping refers to entrepreneurs’ self-funding, mostly through a combination of savings and debt. In this phase, founders will be doing the initial research, testing and creating a Minimum Viable Product (MVP). Also, the founders may not draw salary from the startup and may be working elsewhere. Minimum Viable Product refers to the product that the startup is building to test for technical and financial feasibility.
FRIENDS AND FAMILY
Entrepreneurs receive funding from friends and family. When raising money from family and friends, decide whom to ask and whom to avoid. Keep it professional, limit the numbers and fix the terms. However, you cannot generate much in this round and the amount that can be generated will be minimal.
INCUBATORS AND ACCELERATORS
Incubators are organizations that enable entrepreneurs at an early stage to grow their ideas by providing requisite resources. The innovation or growth mostly happens in-house. The resources and services include space, lab facilities, expert lectures and mentorship. Investors find incubators as an easy way to source early-stage ideas as they consider that this reduces the risk as vetting early-stage businesses and advising founders is done at incubators.
Accelerators are institutions that run structured intensive programs of education and mentoring for a specified period. They take in cohorts of a dozen or so, very early-stage startups for the program through a screening process for this program. At the end of the program, there is typically a “demo day”, where the startups pitch to investors. These demo days help investors find some of their deals. In addition to this program, accelerators often provide a certain amount of cash to the startup, in return of a certain percentage of equity.
They often use standard entrepreneur-friendly term sheets. Apart from demo days, accelerators also introduce their cohort startups to angel investors.
ANGEL INVESTMENT
Angel Investment is typically the first tranche of outside funding - that is, money from people the founders don’t know. This happens whether or not a startup comes out of an incubator or accelerator. There are possibilities of a tremendous amount of money being raised and also multiple rounds at this stage. Investments can be made as selling of shares at fixed value by founders or in the form of debt (mostly convertible notes). A startup typically raises angel investment, when they need money to develop the market, engage in marketing and hire key people. Lately, Micro VCs have also been working in this stage and are making small level investments. Ideally, startups will be raising enough money that can last for a minimum of two years.
VENTURE CAPITAL AND PRIVATE EQUITY
Venture capitalists (VC) look for startups that have real-time traction with paying customers. This ensures achievement of product-market fit, thereby dramatically reducing the risk of failure. However, they also occasionally back successful serial entrepreneurs who have only an idea. Normally, venture capitalists invest in startups that need funds for accelerating their growth. A startup may raise multiple rounds at this stage. The first VC round is commonly called the Series A and each subsequent rounds are termed as: Series B, Series C and so on. Each of these subsequent rounds is a bigger investment and at a higher valuation. VCs raise their funds from inventors termed as Limited Partners (LPs).
Private equity (PE) firms fund mostly at matured startups rather than early stage startups. If a startup has maintained consistent growth, it can attract private equity funding which is a great way to raise funding. Their portfolio companies are managed by them to ensure high returns at exit. VCs and PEs are two types of funding that are made at different stages in a startup. They are often considered to be similar concepts.
EXIT
Exit is the logical conclusion in the entire startup funding process, where investors liquidate their investments for cash. There are multiple ways of exiting and the same can happen at any stage in the entire funding process. When there is no perfect time to exit, angel investors will look at the Return on Investment (ROI) when they liquidate their stake.
Selling of angel investors’ stake in subsequent rounds include acquisition where another company buys a controlling stake or merger with another company. Merger & acquisition may not be the goal of every startup - many hope to eventually make it to an Initial Public Offering (IPO). An IPO is the sale of the shares to the public, where the sale is done under Securities and Exchange Bureau of India (SEBI). Startups have to wait a long period to go for IPO as it requires robust performance and involves huge administrative, accounting and compliance processes.
