Every early-stage startup is bootstrapped growing their business with little or no VC funding. Once the startup picks up, business operations and resources expand and the startup will need funding to manage the operations and the whereabouts. This means that the startup founders must have a better understanding of different stages in startup funding.

To cite, in a previous blog – Creative ways to seed fund your app idea, we looked at why and when tech startups choose to raise funds and explored four major types of fundraising: crowdfunding, angel investors, venture firms, and IPOs.

Applying that now let’s take a look at the different stages of startup funding and get into details of how much money startups might seek at each stage. 

SEED FUNDING

Seed funds are raised during the early stages of a startup. Investors contribute a small amount of money to bring an idea to life. The immediate goal is to produce a minimum viable product.

Seed capital often comes from the company founders’ personal assets, from their friends and family, and sometimes from angel investors. Professional investors and banks see this as a very risky investment. If they do invest, professional investors may seek a considerable equity stake, as they are accepting a high amount of risk.

Seed funding is mainly used for preliminary market research and to develop the minimum viable product. It may also be used for initial marketing of your product to test your market and gain some traction.

Funding range: $50,000 – $1,000,000

• Facebook’s first ads (May 2004) only generated approx. $2,400 in ad revenue. By June 2004, they raised a $500,000 which resulted in angel investor Peter Thiel agreeing to invest $5,000,000 into the project. This money was initially structured as a loan, the financing was later converted to a 10.2% equity stake in the company for Peter Thiel.

SERIES A FUNDING

The next step is usually getting a working product into the market and Series-A funding is the first round of institutional Venture capital funding once an idea has reached this stage.

The name refers to the Series-A preferred stock offered to the investors in exchange for their equity.

Typically, these funds are used for the first two years of operating costs, including software development, server maintenance, marketing, and other business operational costs.

Funding range: $2,000,000 to $10,000,000, in exchange for 10% – 30% stake of the company.

• In 2010, AirBnB raised $7,200,000 from Sequoia Capital and Greylock Partners. At that time, over 700,000 nights had been booked on Airbnb, in more than 8,000 cities. The press release stated, “AirBnB will use their millions to continue global expansion, hire staff, make translated versions of the app and create multiple payment options to suit any lister or booker, no matter what country they’re in.”

SERIES B FUNDING

The second round of funding takes place after the company has proven success with Series-A. In most cases, the company is already making decent revenue in this round.

Commonly, Series B funds are used to expand the team and for scaling the business. It may include salaries, infrastructure costs such as server costs and office space, and may also include marketing and branding costs needed to enter a new region to achieve globalization.

Funding range: $5,000,000 – $50,000,000

• In 2013, Snapchat raised $80,000,000 in Series B funding led by venture firm IVP (Institutional Venture Partners).

SERIES C FUNDING

Series C funding is the third round of funding for companies which have already proved successful in the market and have clear potential for a larger market. The purpose is to accelerate growth. Product diversification, acquisition, and tapping into the international markets are often the main focus points. Big banks, hedge funds, and public companies are involved at this stage, as the amount can be in hundreds of millions of dollars.

Funding range: $100,000,000– $500,000,000

• In 2013, Uber raised $258,000,000, led by Google ventures. This Series C funding put Uber at a post-money valuation of $3.7 billion.

The funding amount and purpose of funding for each round shown above are approximations; it varies based on the company. The number of funding rounds is also not limited to Series A, B, and C; that depends on the growth of the organization. For instance, Pinterest, founded in 2009, has accumulated $1.3 billion in funding. Their latest round, in 2015, was a Series G, which raised $186,000,000.

FUNDRAISING HISTORIES OF SUCCESSFUL STARTUPS

Facebook had four rounds of Series C funding and accumulated over $200,000,000 in funding before going public.

Uber used several rounds of funding to sustain its expansion. The latest funding from Baidu garnered 1,200,000,000 U.S. dollars in private equity, taking the total funding to over $10,000,000,000 by 2015, far exceeding the amounts raised by any company before in IPO.

Airbnb saw more rounds of funding totalling $2.39 billion by 2015. The latest funding, by Firstmark Capital, accumulated $100,000,000 (private equity).

Whatsapp did not have any more rounds of funding. However, on February 19th, 2014, Facebook acquired Whatsapp for a reported $19 billion.

Atlassian, founded in Sydney, Australia, raised $462,000,000 with its IPO on the U.S. NASDAQ exchange.

Spotify received further rounds of funding from investors. On June, 2015, Spotify received $526,000,000 from a total of 13 investors, taking its total funding to $1.06 billion.

Conclusion

We hope you found this article helpful and we believe that if you are an app startup entrepreneur it is important to know the different stages of startup funding. This not only will help you raise capital for your startup in time but helps in planning out the entire funding process for your startup.

You might also be interested in reading the article on top five things that investors look when investing in a tech startup.

How should I raise funding for my mobile app startup?

This has been the question asked by most of the app entrepreneurs. A recent study by US Bank study, Jessie Hagen, says 82% of the startup fails because of the cash flow problems.

Raising capital could be the nightmare but as app entrepreneurs, if you have taken the leap to start up your business. Raising capital need not be as scary as starting up. In fact, it’s not rocket science. If your App idea has validated the product market fit, we are sure you will succeed in raising capital for your app business.

In this blog, we explain the key issues to explore before choosing your funding options, and the different options available during the life cycle of your app business.

Below are the three questions that pop up when you think about raising capital:

• Should I raise funds for my app idea, and if so, how much?
• When is the right time to get the funding for my app idea?
• What’s the best way to find money for my app?

The answer to these questions really depends on where do you see your app business in 10 years. Your decision-making becomes much easier once your vision is clear. 

TO RAISE CAPITAL OR NOT TO RAISE?

If you want the app to provide a good lifestyle with less working hours and steady cash flow for yourself, you’re better to self-fund as much as possible. It is possible to fund a successful business without external investment.

• Markus Frind founded the dating site Plentyoffish in 2003, and built it to a very profitable company without any external funding. In 2015, he sold it to the Match group for $575,000,000 U.S. in cash.
• Zoho is a very successful Enterprise software company with hundreds of thousands of users which never took any external funding, and founder Sridhar Vembu shared he has no interest in funding (or an exit strategy) in spite of getting calls from investors every day.

Of course, many people launching a tech start-up don’t have the option to fund the project themselves.

RAISING MONEY: WHEN DO YOU START?

This is a very difficult decision which weighs on the reality that the sooner you raise funds the quicker you can release your app vs. the fact that the sooner you bring an investor on board, the less you have to show them which generally5 results in them asking for a larger share of your idea.

A rule of thumb is that the best time to raise funds for an app idea is to ensure it’s there before you need it. Note that it’s a fact that getting investors on board when all you have is a great idea has its own challenges.

The best case scenario is that after you have spent a little time and money on things like an app prototype or generating data to show there is a demand for your product you can raise funds without giving away as much of your equity.

3 Main Funding Options

There are three main funding sources for tech start-ups: crowdfunding, angel investors, venture funds, and “going public,” or IPO. Let’s look at each.

Crowdfunding

Crowdfunding is a way of attaining capital from a large pool of individual investors, friends, family, etc. This funding option also leverages the networks of these individual investors, increasing your reach exponentially. There is no limit on how much money you can raise using crowdfunding.

However, most crowdfunding platforms impose a time limit within which the target has to be achieved. Therefore, it is important to be reasonable with your funding goal. Also, running a crowdfunding campaign involves a learning curve and takes a lot of time, so be realistic about that as well.

There are two types of crowdfunding options available.

• In reward-based crowdfunding, entrepreneurs offer rewards that supporters receive if the funding goal is attained, such as t-shirts, experiences, or the product itself when it’s complete.
• In equity-based crowdfunding, entrepreneurs offer equity in exchange for capital if the funding goal is attained.

 Some popular crowdfunding platforms include Kickstarter and Indiegogo. Popular crowdfunding platforms specializing in mobile apps include:

• Appsfunder
• Appbackr – Surf
• Appsplit
• Angel

Angel investors

Angel investors are wealthy individuals who invest in start-ups in exchange for equity in the start-up company. These investors generally invest in the early stages of funding, providing seed funding anywhere from $25,000 to $1,500,000.

To look for potential angel investors, do an internet search for angel investors in your city. Don’t write them a cold email; see if you have can get an introduction from a mutual contact. Use LinkedIn to find out if you have a mutual contact, and to research the angel investors that you’d like to target. Go to events they go to, network, and ask them out for a coffee.

MELBOURNE ANGEL INVESTOR GROUPS

• Australian Investment Network
• Melbourne Angels
• Melbourne Investors
• Business Angels

Venture funds

Venture capital funds typically come into play after seed funding. Venture capitalists obtain funds from a plethora of sources, such as foundations, wealthy individual groups, endowment funds, etc. They invest much larger amounts than angel investors. Venture capital firms invest in businesses, not ideas. They care about the ability to execute. So get your idea built, get customers, create revenue, and then approach VC firms.

Below are some VC firms in Australia.

• Adventure Capital 
• BlackBird Ventures
• OneVentures
• Starfish Ventures

Initial Public Offering

IPO, or Initial Public Offering, is when your company shares are sold to the general public, usually with the help of an investment bank. This is when the founders and investors monetize to get a return on their investment. A company selling common shares is never required to repay the capital to its public investors. The ability to quickly raise potentially large amounts of capital from the marketplace is one reason many companies go public. The disadvantages of going public are that the founders lose a lot of control over their own business, and are subject to much higher legal and compliance requirements.

Some noteworthy Australian start-ups that went public includes:

• Started in 2002 in Sydney, Australia, with a $10,000 credit card, the founders say that the company has always been profitable. In December 2015 the company went public, selling 22,000,000 shares at $21 a piece, raking in $462,000,000 at a market valuation of nearly $4.4 billion.
• Founded in September 2011, founder Ruwan launched the platform in July 2012 and went public in just three years, in October 2014. The IPO raised $4,000,000, valuing the company at $30,000,000. It received a lot of criticism because it was too early and had only 64 paying customers at the time of IPO.

Alibaba and Facebook are two of the biggest IPO’s ever. In September 2014, Alibaba, the Chinese e-commerce company went public in the US NASDAQ exchange at $21.8 billion, making it the biggest IPO ever at that time. When Facebook went public in May 2012, it raised $16 billion.  

Fundraising is an essential skill for most start-ups. It isn’t enough just to build a fantastic app; you need business skills to build a sustainable company. Putting some time and research into fundraising from the start can help transform a great idea into a successful startup.

If you want to learn more about the different stages of funding an app startup, read about it here.