A tech startup needs capital to set the ball rolling in its nascent stage. You must identify the financial needs of your tech startup at every step of its funding so that you have clarity on how to put the resources to use. An in-depth understanding of the different stages of investment will help you interact with your investors with clarity on how either party will benefit from the deal.
Different Stages And Types Of Investment For A Tech Startup
The five stages elaborated below provide a concise idea to get you started.
Stage 1: Seed Capital
The earliest source of funding for your startup is seed capital. Such sources include your acquaintances, credit cards, crowdfunding, or personal savings. Here, you need to clarify the interest in their investment in your tech startup. Aim to provide constructive output and update your partners regularly on your startup’s performance.
The money that you raise at this stage goes into market research and developing a first model of your product or a Minimal Viable Product (MVP).
If the above-mentioned funding resources are not available, seed accelerators are potential options. Seed accelerators, also known as startup accelerators, are business programs that take the initiative to invest in your startup and support your business venture at its embryonic stage through mentorship, education, and financing. These business programs further your startup’s potential by pitching your solution or product to potential investors.
Stage 2: Angel Investors
Angel investing might be your solution in this phase. The needs of your startup will eventually increase with time. Hence, you have to scale up financing towards product development and marketing or expand your team to pace up.
You have to prove the viability of your business model if you want to secure funds from angel investors at this stage.
The SEC defines an angel investor as a high-value individual who has a net asset of one million dollars or more or $200k as earnings in the past two years or having a joint income of $300k with a spouse.
They may invest in your startup individually or can also invest their money as part of a group.
The funds raised during this phase can be considerably higher than in the seed capital stage. Therefore, the angel investors will look for a well-researched and convincing pitch.
Stage 3: Venture Capital Financing (VC)
Venture Capital (VC) Financing is a type of private equity and financing that an outside investor, also known as Venture Capitalist, offers to startups and small business enterprises with the potential for long-term growth. Venture capital generally comes from well-to-do investors, investment banks, or any other financial establishment.
Venture Capital Financing can provide capital to amp up your business to diverse business channels, customer service or enhance marketing strategies to expand your startup’s customer base.
The venture capitalist does all this to gain an equity stake in your business.
They finance your project despite knowing the potential risks insofar as your startup’s future gains and cash flow are concerned. Thus, such finances have been aptly termed as risk capital or patient risk capital.
This robust surge of investment can be an offset against the losses suffered from the negative cash flow in the initial stages of your startup development. This promotes the healthy development of your business venture. Several cycles of funding may occur at this stage.
The venture capitalists show hairsplitting diligence while analyzing your business blueprint. VCs evaluate your strategy based on your target market, product, your intended business model, and management interactions. They will collaborate with you only if they find your business approach flawless and credible.
VCs ensure that they invest in startups that have the potential to yield a robust ROI for their clients. You should be adequately prepared to respond to all their queries convincingly to pass muster with the VCs. Hence, this phase is aptly termed the ‘due diligence’ phase. You may check these statistics to understand the popularity of VCs.
Stage 4: Mezzanine Financing
Gradually your startup heads towards considerable growth and looks forward to scaling up with your app or tech solution that has been launched for sale. This ensures a steady inflow of revenue even if your startup has not generated profits yet.
This marks the entry of your tech venture into the later stages of the ‘Early Phase’ wherein it has a tried and tested business formula with a multi-functional team, a commercially ready product/solution, and has gained a satisfactory sales thrust.
A mezzanine funding provides surplus capital for spurring the growth curve of a tech venture. Principal mezzanine investors are angel investors, venture capitalists, and corporate venture capitalists.
This type of funding is also known as bridge funding because it prepares the ground for further expanding your venture before an IPO (Initial Public Offering). A mezzanine financing can include the costs of an IPO. The tech venture pays back the principal capital with interest to the mezzanine investor from the proceeds made from the IPO.
Stage 5: Initial Public Offering (IPO)
If you have fundraised through the aforementioned stages, opening up to the public takes your tech venture a step further. Through an initial public offering (IPO), you can offer the shares of your startup to the public by issuing new stocks.
A public share issuance enables you to raise funds from public financers. The transition from a private tech enterprise to a public company allows private investors to realize a profit from their investment as it typically includes shares for the present investors.
To sum it up, you can cash in on the stock options of your tech startup to attract top investors and increase funding to acquire resources for pacing up the operations of your tech enterprise. Once a tech company finds itself on the NASDAQ lists, it is in the big leagues for a prosperous run.