How to Raise Capital at Each Startup Stage: Fundraising Step by Step

Each startup funding stage is associated with a different phase of the startup lifecycle, and the amount of funding available at each stage can differ drastically. However, the fundamental elements a founder needs to have for raising capital are similar at each stage: a clear business vision, a solid team and a strong financial plan. Be prepared for your fundraising journey with an understanding of what to expect at each stage. 

The players: Who are your investors?

Depending on the startup funding round you’re in, your investors may simply be family and friends, or they could be larger institutional investors. Startups often look for the following: 

• Angel investors: High-net worth individuals who invest in seed-stage startups in exchange for equity in the company. Their investment amounts are usually smaller than institutional investors, but they offer shorter closing times and don’t interfere in day-to-day operations. 
• Early-stage venture funds: Institutional investors that are vetted and can provide both money and business expertise. Venture capitalists (VCs) always exchange company shares for their investment, but they can provide more capital than an angel investor and offer significant resources in industry experience.
• Startup accelerators: Firms that offer select startups a set funding amount in exchange for equity in the company, mentorship opportunities, demo days, pitch events and sometimes co-working space. 

Due diligence on potential investors is important to find the right fit for your industry and your values as a company. Building a relationship with close and consistent communication will help you secure funding for your startup.  

The pitch: what is your story?

Expect to pitch to many investors. Your vision, your differentiators and your metrics will be important to know inside and out in order to answer tough questions. Be prepared to present the following:

Use of Proceeds Itemization: Investors want to know exactly how much you’re asking for and how that funding will be used to get to either profitability or the next funding stage. Fractional CFO Chris C. recommends a Gantt chart format: “It identifies what needs to be done to get to the next stage, who will do it and how long it’s going to take.”   

Minimum Viable Product (MVP): When presenting to investors, a founder must be able to show a product with enough features to attract and be used by customers.

Team: It’s important for investors to see the team that is going to bring the company’s vision to life. Chris C. elaborates: “Typically, we want to know [about the team], because we want to know the durability that this is going to have. We don’t like turnover. We like things that work well together, that are sustainable and can grow and can scale.”

Executive summary and pitch deck: In every round of funding, the founder will need to present a polished pitch supported by a brief deck that outlines everything mentioned above as well as: 

• The problem your product addresses and solves
• Your target customer
• Your proposed business model
• The total addressable market 
• Current and future financial results (e.g., income statements, balance sheets, cash flow analysis, and future projections) 
• A breakdown of company costs 
• A breakdown of competitors

With the exception of the MVP, these requirements remain much the same as the company moves through the next stages of raising capital. However, the content of the pitch deck, the Use of Proceeds Itemization and even the team will likely change as the business evolves.

The deal: is it the right fit?

When an investor is interested, your business will receive a term sheet, which is a non-binding contract that includes the terms of the investment. Founders in Series A and Series B funding stages can benefit from the fundraising experience of a part-time CFO to counsel the business on valuation, ownership and restrictive covenants within the agreement. 

Raising capital at different startup funding stages

Seed Funding: getting off the ground

At a startup’s pre-seed stage, founders are developing a prototype product and proving that there is an existing market. The company may be pre-revenue, so its work is usually funded by the founder’s personal savings, loans from friends and family and, more recently, crowdsourcing. 

Once a startup has a prototype product, critical team members and some signs of a product-market fit, it can qualify for funding. Seed funding usually funds product development, employee salaries and infrastructure expenses. At this stage, a company could potentially secure a few million dollars in funding from angel investors, VCs or an accelerator.

Series A: creating a viable business model

Once the company has established a proof of concept for their product, solidified a core team and tested their business model, it will seek Series A funding. 

This round generates much higher funding amounts—typically over $10 million—than the seed funding rounds, so smaller investors don’t usually engage. Businesses at this startup funding stage primarily pitch to institutional investors.

Capital is typically used to turn a product from a proof of concept to a viable, profitable business model. This includes funding marketing and sales, employees, equipment and other investments to help make the company publicly viable.

Series B: expanding a profitable business

Startups at this funding stage are established players in the market. The company should be generating stable revenues, earning profits and maintaining a solid valuation. Similar to previous rounds of funding, the business will need to sell shares in exchange for Series B capital, but investors in this round will pay more for these shares due to the lower level of risk. For this reason, companies can usually generate over $20 million in capital in this round.

At this stage, startups also have the option of a few additional VC firms that specialize in late-stage startups. The goal is to take the company’s growth to the next level to meet rising demand. That means investing in sales, additional markets, new technologies and additional talent acquisition.

Series C: no longer a startup

These businesses are established, successful companies with solid revenues, profits and market share in their target region. The business’s valuation may be over $100 million, typically raising $50 million in capital.

Investors from previous rounds will continue to participate. However, large financial institutions like investment banks or private equity funds are also viable sources of capital. These investors are interested in mature companies, because the risk on their investment is lower. 

Companies seeking Series C funding are looking to expand to new markets, invest in research and development or participate in a merger/acquisition. While businesses could continue with additional funding rounds, many companies will prepare to grow toward an Initial Public Offering, or IPO.

Find support throughout your fundraising journey

Business founders and CEOs benefit from experienced finance leadership to partner on their fundraising journey. “Most [startups] couldn’t afford to hire a full-time CFO, nor do they need one, but they just want someone whose eyeballs are looking there… and they want someone that understands [the funding stages],” states Chris C. 

Learn more about Paro’s strategic advisory and CFO services for startups. Our vetted, remote experts offer qualified financial leadership to help your business seize its biggest opportunities, whether you’re preparing for the next round of funding or revising your fundraising strategy.