For any start-up, finance is a key issue. Due to risk factors associated with start-ups, it is not easy to attract a lot of investors. Hence funding is typically divided into rounds because it gives a clear picture to its investors of what stage a start-up is at and what tasks it is currently solving. There are certain companies who are a part of the stock exchange (public companies) and some are not (private companies). What makes these companies go from a private company to a public company? First look at the difference between a public company and a private company.
Private company: A private company is the one not listed on the stock exchange, and it raises funds through private investors or venture capitalists.
Public company: Public companies can raise new money by listing themselves on the stock exchange. Their securities are traded publicly, and companies can sell shares which means they also have the benefit of liquidity. Through an IPO it becomes easier for businesses to have access to large sums of money which eventually helps in growth, mergers, and acquisition.
When a private company grows, before going for an IPO (Initial public offering), it goes through a series of transitions which helps it raise money better. As a business becomes mature, it tends to advance through the funding rounds. Following are the financing steps discussed in detail
1. Pre-seed: as a humble beginning, an idea of a company is generated in the mind of an owner. The owner would need funds to execute the plan and would ask friends and family for funds to start working. Raising money is the basis of this step. Mostly financing is done through the founder which is called ‘bootstrapping’. The main task of pre-seed funding is to test the hypothesis of a business idea. Start-up founders must prove the growth of their business enough to reach out to investors for funding in the next stage.
2. Seed: At this second stage of funding, investing usually stimulates substantial growth. Once the startup takes off, founders may seek the need of potential investors to fund their venture. Angel investors or venture capitalists may come for help at this stage. These close network investors are high-networked individuals with experience and contacts. They would look at the potential in the idea and lend out money. Before lending money, analysts would clearly examine the business model, pros and cons, and other market factors. The primary reason for raising money at this stage is for scaling and marketing the product. Scaling occurs when a business multiplies its sales volume without increasing staff or cost. Founders must be aware of why they are willing to push their concept further to the market.
As a company starts hiring and its expenses pile up, it would need larger funds. If a company manages to get to series A funding, then it is aware of the key parameters. At this stage product testing is done to analyze its market fit. This means a company has developed a product and the product is also getting used to the market, so this test is done to see if there’s any fit and if people are willing to buy the product. The company is, however, still trying to figure out if the business is going to work. Money is raised and the product is launched through verified sales channels. Employment rises and traction is received from the public. For a series A funding round, a network of contacts with potential business partners and investors must be well-nurtured. Lasting business relationships don’t happen overnight. Once proven trustworthy, by showing developmental process made with seed capital, a business can attract new investors according to growing business needs.