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Understanding the funding cycle: The value of a funding strategy

August 27, 2020 | Venture Capital

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Understanding the funding cycle: The value of a funding strategy

Funding can be a painful process that distracts the management team from growing their business. However, getting the right funding in place can actually help your business grow quicker and more successfully than if you didn’t raise any funding at all.

It’s important to view funding as part of your long-term strategy, and not a quick fix..

This also means considering how the right investor can add value to your company. Investors can act as a mentor, provide expertise in your industry, and give you access to their network. 

Nurturing investor relationships also takes time, and maintaining confidence is essential to a rewarding partnership. Keeping your cap tables accurate and up-to-date equips investors with transparent financial information that captures shares and other investment information. 

Continue reading to discover the stages of the funding life-cycle, along with key takeaways to consider when building an effective funding strategy.

An overview of the funding life-cycle1. Bootstrapping

Bootstrapped companies typically build from the ground up with personal savings or funds from friends and family.

2. Pre-seed: Initial funding for startups

When personal savings run low, it’s time to do your first real funding round. By this point, you should have a well developed idea, some solid market research, be able to demonstrate your product/market fit, and have a solid understanding of your revenue opportunity and the risk of achieving it. You should also have either started product development, or have detailed plans mapped out for product development.

Investors at this stage are generally friends, former work colleagues, angel investors, incubators, and accelerators. Expect to be diluted around 20% to 30% at this early stage. 

There are also numerous government grants available. However note that applying for these is usually very time-consuming (time which you should be spending building your product!).

3. Seed

You should now have a working prototype, and some trial users or even a small amount of sales revenue already. It’s time to do a bigger funding round to launch the full product and drive customer acquisition.

Typical investors at this stage are mainly angels, but also include very early-stage VC funds (though most tend to focus on Series-A onwards). In addition, crowdfunding is an option though tends to favour companies that have a very retail-focused product more than B2B products. Expect to be diluted around 20% in this round.

While it’s important to get the funding you need, it’s equally important to get the right investors here. Finding seed investors that bring experience, mentoring, and sometimes business relationships, can accelerate your user and revenue growth. If it’s a choice between a 20% dilution with a seed investor that doesn’t add relevant value, or a 30% dilution with an investor that brings a lot of experience in growing your type of business - I would take the bigger dilution every time.

4. Series A / Early stage startup

By this stage companies will typically have £500,000 or more of revenue. You’ve clearly demonstrated product/market fit, and now it’s time to ‘scale’. This funding round gives you the funds to get your business scale ready, from assembling the right team, to deploying cash into the right marketing channels for your customer demographics, this is when it happens.

This round is entirely VC territory. If you have consumer / retail-focused product, then you could consider crowdfunding, though generally companies need more than crowdfunding alone can provide at this stage. Expect to be diluted around 20% in this round.

Note: for clarity, if you diluted 30% in the first round, and then a further 20% in each of the seed and Series-A rounds, then you’d have around 45% left now (e.g. 100% x 70% x 80% x 80% = 44.8%). 

5. Series B / Growth

By now you should have at least £3m of revenue or higher. Your business should be completely scale ready, and the funding round you do now should be directed almost entirely into marketing and sales channels, and scaling your customer and revenue growth.

This is well and truly VC territory. Expect to be diluted 10% to 20% in this round.

6. Series C (and D/E/F/etc)

The Series letter can go on indefinitely, but you get the idea here. By this point in time you’ve got a well and truly proven commercial model. Any new funds you raise go straight into growing your revenue by your proven sales and marketing acquisition funnel. If you have stable cash flow then it makes sense to start looking at a combination of equity and debt funding to reduce your dilution.

7. Exit

As your business grows, you will be approached many times by potential acquirers. It’s a good idea to regularly review your own ambitions for the company, and - critically - make sure your team is on-board with you at every step.

You could look to exit by a competitor acquiring you, or if you want to continue your growth journey then an alternative is to become a public company in order to access an even bigger pool of funding.

What to be aware of when building a funding strategy

Successful funding requires a long-term strategy. Don’t just think about the here and now - consider your company’s future. What type of investor do you need to increase your chance of success - what can they bring to the table? And, where might funding come from in the next 2 to 8 years, and how does that align with your growth objectives? The right investor will typically stay with you through 3 or 4 funding rounds, investing more at every stage.

Plan for future rounds of funding

Most companies require many rounds of funding throughout their lifetime, so seeking investment shouldn’t be approached as a stopgap for a short-term problem. Instead, your funding strategy should focus on the future by establishing and nurturing strong, long-term partnerships with investors. 

Mapping out your funding strategy gives you clarity about your company’s goals for potential investors (especially angels and VCs). Having a clear plan helps you understand and identify the right investor for your company, making it easier to know where to focus your attention. 

Understand the power of cap tables

A boring, but critical part of your funding strategy is getting the cap table right. Because most founders don’t think about this ahead of time, mistakes in cap tables very regularly cause issues and delays in funding rounds, and sometimes even cause investors to walk away. From regulatory filings, to share certificates, to correct documentation and tracking of employee share options, it’s too easy for simple errors to cause bigger problems later.

The good news is, it’s easy to get all of this right if you address it early on. Globacap’s platform takes care of your cap table for you, removing a layer of pain, and freeing you to focus 100% on your business growth and funding round success.

Focus on today, but build for tomorrow

A funding strategy is an investment in your business growth to ensure long-term success. Understanding the funding life-cycle allows you to create a strong, stable funding strategy to show investors your business is a credible, trustworthy investment option.

We have a checklist to make sure your business ticks the boxes of today’s investors. Download our free checklist today. For more information on how a cap table can help you manage your shares from the start, click here.

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