Startup Investment Rounds: Everything You Need to Know
Startup investment rounds are a vital component of the startup investment process. 3 min read
Startup Investment Rounds
Startup investment rounds are a vital component of the startup investment process. A private investor network connecting startups with investors is a vital tool that benefits both parties. You may encounter them as you negotiate deals as a company founder, or as an investor who wishes to attract additional capital to an existing business.
To get a better understanding of investment in the modern age, you’ll need to get a firm grasp over changes in raising capital in the startup field. Investment funds have increased exponentially, and you must be aware of peak periods when it comes to fundraising. The peak times are usually determined by over-investment and a subsequent belt-tightening. Despite such fluctuations, the overall trend in fundraising is largely positive. On a year-on-year basis, startup firms raise more capital at higher value.
If a bubble exists, it has yet to burst, and the heightening of business valuations got many people speculating about a potential bubble ready to burst. However, the data reveals that the slowdowns are short-lived and will not lead to a burst anytime soon.
When it comes to risk, the perceived risk levels influence the types of investors that are attracted to deals, including the amount of funds raised. Therefore, you should expect early investment periods to garner angel investors who are willing to take risks, including venture capitalists. Moreover, late-stage fundraising is more likely to attract financial institutions that have more of an aversion to risk.
- Note: 80 percent of venture capital investment occurs in the enterprise, with a bulk of such investment going to enterprise software. The second most lucrative area is the biotech field.
The continued growth in investment forged a type of fundraising inflation, where startups expect to work hard for every investment around than in previous years. The investment world has seen the start of a new term in the fundraising world: pre-seed investment.
A fictional start-up will receive around $15,000 from friends and family members and another $300,000 from an angel investor a few months later. In addition, around $2 million derived from a venture capital firm five months after, provided that all goes according to plan. The opposite side of funding is known as bootstrapping, which is the process of funding start-up companies through personal savings. Companies such as Airbnb and MailChimp got off the ground through bootstrapping methods.
- Note: Each time you receive funds, you lose a piece of your company by giving up company shares to investors.
A piece of a company you choose to give is called equity. Therefore, all investors who receive equity shares are also co-owners. The basic premise behind equity is a dividing of the pie. When you began a venture, the pie is small. You have a 100-percent share in the small pie, but seeking outside investment allows the pie to grow larger.
- Example: When Google issued public shares, Sergey and Larry had 15 percent of the pie. However, the 15 percent was a large slice of the pie.
The primary differences between rounds pertains to the following:
- Maturity levels within the business
- Investment types involved
- The goal of raising capital
- How the funds are allocated
The funding rounds start with seed capital. Keep in mind that investors are simply not about altruism. Although many are interested in a start-up company, they wish to see a return on their investment at some point. Before every round, a company valuation is usually released. Valuations stem from such considerations as:
- Proven track records
- Market size
Access to More Capital
To expand the circumference of your pie, you must have more slices to give away to investors. Further, most slices will be offered for investment funding. Many starting owners with large ideas would rather keep a small slice of a large pie than the entirety of a small one.
Seed rounds are usually labeled as the first fundraising round that is available to company founders. However, a largely competitive marketplace of company startups has caused traditional seed investors to grow more discerning in the number of startups, which raises the bar necessary to attract traditional seed funds. A usual pre-seed round would see a company get a small investment to hit some milestones necessary to get ready for true investment seeds.
To learn more about a startup investment rounds, you can post your job on UpCounsel’s website. UpCounsel’s attorneys will provide more information on the funding process and what you can do to gain the most capital for your start-up company. Moreover, they will guide you through the registration and maintenance process of your legal business entity if you are a starting entrepreneur.