Published 04 January 2018 Category: Entrepreneurs, SMEs, Startups, Business

Understanding Startup Funding

It’s the ultimate enterprise dream – to be your own boss, start your own company and make money from doing what you love. Inspired by stories of Silicon Valley success, Hong Kong’s startup scene is flourishing and there’s no shortage of new ventures and innovative ideas.

All that said, getting your big business break requires more than just a good idea. It takes careful planning, a broad network and importantly, a healthy stream of funding. With support from an investor or financial backers, you don’t have to be millionaires to make your startup dream a reality – here’s a breakdown of the different stages of start-up funding so you can get started:

The Seed Round: Finding Angel Investors
The ‘seed round’ is the preliminary round of investment for a startup in its conceptual stage. It is more speculative in nature but can provide the necessary investment to progress a startup from its infancy. Capital at this stage is provided by individuals referred to as ‘angel investors’, ‘business angels’ or ‘seed investors’ that help launch startups or entrepreneurs in exchange for ownership or convertible debt. The capital can be a one-time investment or consist of ongoing funds to carry a business through its early stages. Angel investors may consider opportunities for a startup’s initial public offering, acquisition or exit strategy.

With a high degree of uncertainty attached to startups, angel investors will often secure ownership equity or convertible debt in exchange. But, investors continue to provide the capital investment that startups are unlikely to attain from banks. The seed round is also best placed to identify any potential concerns with an idea and if successful will provide a small investment for a startup to take its first steps in producing a working prototype of a product. As some startups will have a prototype of initial infrastructure in place before seeking investment, a seed round may not be necessary. Businesses that do raise capital from a seed round can invest money to cement the type of product or service to develop, conduct research within a marketplace, identify specific demographics to target or to hire a team prior to launch.

To raise funding in the seed round, startups can use crowdfunding, either reward-based or equity-based, where equity is provided in return for investors.

Series A funding: Launch and Learn
Startups that can progress to this funding stage have an advanced prototype and cemented idea of the product’s purpose. With a larger pool of funding than the seed round, startups can seek three to seven million dollars of investment in series A funding from Venture Capitalists. Venture capitalists support startups that are looking to expand but lack the access and investment to enter an equity market. They are likely to take a risk and invest in a startup with the anticipation that it will generate high returns on their investment.

The investment acquired in series A funding can assist a product’s launch in the market and helps define the best distribution channels, identify new markets and fine tune business models for its products or service. Capital can also help define business goals, redefine sales targets or accompany the launch of a new product.

Series B funding: Expand To New Horizons
This stage in funding can attract anywhere up to $50 million in investment to truly support establishing the business. By the series B stage, a product roadmap and business model should clearly demonstrate how the product will expand into a broader market. Investors will look for scalability – strong management in production, active marketing activities and an established user base. The investment in series B funding can accelerate new team hires, potential acquisitions or mergers and chances to expand into the global market.

Series C funding: Accelerate The growth
Reaching the series C stage of funding is an indication of a business’ maturity and profitability. Unlike the earlier rounds of investment, series C invites investment banks and Venture Capital firms to contribute to the business’ upcoming IPO or acquisition plan. Series C funding can attract up to hundreds of millions in capital to accelerate plans to launch in new markets and platforms.

The Sky’s The Limit 
The funding process is not as linear as expected and the sky’s the limit for the number of investment rounds a startup pursues. The progression of capital raising can shift depending on the product and the business. There is also a potential for investors to have misaligned expectations for each round so ensure any communication is always clear and seek assistance when necessary. Always have a growth strategy and product development in place to attract the right kind of investors and secure your startup’s long-term success.