Types of funding
Equity funding: Equity funding involves selling a portion of a startup’s equity in return for capital. For example, the owner of Company A might need to raise capital to expand the business. The owner then decides to give up 10% of ownership in the company and sell it to an investor in return for capital. Equity finance generally involves the exchange of new shares for a cash investment. The business receives the money it needs and the investor will own a share in the said company. This also means the investor will benefit from the success of the business.
Debt Financing: Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the capital and interest on the debt will be repaid. Here, there is no exchange of money for shares rather the startup collects loans from investors for a return on their capital at an agreed interest.
Hybrid Financing: The hybrid financing definition includes characteristics of both debt and equity, two ends within the financial spectrum, to provide financial security. Hybrid financing is where debt and equity meet in the middle, offering investors the potential benefits of both.
The Funders/Investors
Angel Investors: An angel investor (also known as a private investor, seed investor, or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur’s family and friends. Also, Angels can be well-meaning individuals who are interested in helping a startup get its feet off the ground.
Private-equity firm: This is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital. These companies are not listed on stock exchanges.
Venture capitalists: A venture capitalist (VC) is a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake. This could be funding startup ventures or supporting small companies that wish to expand but do not have access to equities markets.
The funding stages
Pre-seed: Pre-seed funding is an early funding round in which investors provide a startup business with capital (sometimes up to $2 million) to develop its product in return for equity in the company. Most Venture capitals and private equity firms don’t invest in a startup at this stage. The only people willing to take a chance at the startup in this stage are Angels.
Seed: Seed capital is a relatively small amount of money that is used to start a business, fund research, or develop a product. Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises. This stage comes after the startup has gained traction to attract venture capitalists, instructional investors, and private equity firms. Some companies never extend beyond seed funding into Series A rounds or beyond.
Series A to B: Series A to B financing is primarily used to ensure the continued growth of a company. The common goals in the Series A and B rounds include reaching milestones in product development and attracting new talent. At this stage, the startup has entered its target market but needs financing to build relationships with customers and further improve its business models.
Series C Upwards: This is financing used by startups to maximize profitability, and growth, expand into new markets and push out new products.
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