Back to “school”, new season, the ideal time to rescue that idea, project, or business that you have been thinking about while enjoying a mojito looking out to sea.
While you were finishing the mojito, you have considered leaving everything in search of a dream or combining your professional life with a project that makes you feel fulfilled.
One of the biggest difficulties in this type of adventure is identifying the moment and who has to invest in your business. Some startups introduce a Business Angel too early or others that open a financing round when they need it.
In this article we will explain the different stages of financing a startup:
1.- Seed Stage: this level is the initial stage, where the business idea is being built, as well as the product or service. At this level, a large prior investment is not required because there is still no clearly defined and developed a business plan. However, as time goes on, as the business develops and takes shape, some problems begin to arise for the entrepreneur and opportunities to partner with the co-founder.
The co-founder, in this case, is usually a specialist in the business, contributing a part of the capital in exchange for his work. Normally there is no pre-established amount but the usual, if there are two, is 50%.
From here, it is time for the idea to hit the market, therefore, it is necessary to raise funds so that during the first month’s work is done calmly. At this time the first investors usually arrive, called 3 F, Family, Friends, and Fools. Those who contribute a small amount of capital to the company in exchange for a small percentage or even no percentage. It is usually around 10,000 euros in exchange for 5%.
2.- Early Stage: The product is already on the market and the first benefits begin, reaching the initial objectives of the business model. As the product consolidates in the market and the business model develops, the company experiences growth with the need to hire employees.
At this stage, investors and specialized funds to look for a financing round that helps develop the business model, increase the workforce and be able to have more capital to go less drowned, usually contribute around 30,000 euros in exchange for 10 % of the company.
One could also talk about other forms of financing such as business angels, who in addition to providing capital in exchange for a percentage, also serve as a mentor.
3.- Growth Stage: at this level, the startup is already stable, with a more consolidated position and stable profits. At this stage, the company must face its competitors and invest in products and services to improve them and thus be able to gain market share.
Here, although the company is already defined with profits and cash flows that cover a large part of the daily needs, external financing is still necessary. In this case, venture capital is a form of financing that helps to obtain an investment of more than half a million euros in exchange for a high percentage of the company in what is called Series A financing.
4.- Expansion stage: at this level the company expands to other markets. In this phase, it is necessary to have a defined and clear strategy, any error can pose a greater risk. The external financing of venture capital is a fundamental part of this level since bank credit is at a minimum.
5.- Exit: at this stage, the company will try to absorb or merge with other companies, maintaining both brands independently. Another option is the listing on the stock market through IPOs, a public offering for sale. The latter is a more or less easy way to obtain financing once the venture capital rounds of the founders and initial investors have been liquidated.