Do you have a great idea with major potential but are unsure how to convince investors to part with their money?
Early stage funding is an invaluable source that can help you realize your idea. Still, without it, you risk being stuck in the idea stage.
As a startup founder, I know firsthand the overwhelming feeling of needing to secure early stage funding. If you’re anything like me, you probably ask yourself, “Where do I even start?”
That’s why I put together this guide to early stage funding: to provide you with the information and resources you need to successfully secure funding for your startup.
Whether you’re an aspiring entrepreneur or an investor looking to gain insight, this guide will provide you with a comprehensive view of early stage funds.
Let’s get started!
What is Early Stage Funding?
Early stage funding is an important form of financial assistance for businesses that have already gotten off the ground but need help scaling their operations.
Many young businesses would never make it off the launch pad without early stage funding.
With early stage funding, startups can put their money into elevating their operations like:
- hiring more staff
- creating innovative products
- starting marketing campaigns
- or expanding into new markets
Early stage funding fuels growth, allowing entrepreneurs to take their companies beyond their early infancy and soar to new heights.
Early stage funding typically comes in two phases: Series A and Series B.
Series A Funding
Series A funding is the first round of equity financing for a startup, typically led by venture capitalists. It covers early-stage development and expansion of the company.
This funding goes toward early stage business expenses like:
- the development of product prototypes
- market testing
- and launching a minimal viable product
At this point, ventures have more money to offer than seed funding, but receiving this funding comes with greater risk.
Series B Funding
When a company surpasses the development stage and proves marketable and profitable, Series B rounds provide the capital needed to take them to the next level.
This funding goes toward methods of scaling your business, such as:
- ramping up production on a larger scale
- developing more compelling marketing techniques
- and competing seriously with other industry players.
To provide Series B funding, investors will focus on a few key points regarding:
- the future profit forecasts of your business
- its position in comparison to current competitors
- and any intellectual property it might have that could benefit the marketplace.
Overall risks are considerably lower at this juncture than those of early investments like the Series A rounds.
What is Seed Funding?
Before you seek early stage funding, you must acquire seed funding.
Where early stage funding is the capital acquired for a business already off the ground and running, seed funding allows entrepreneurs to launch their initial business idea.
It’s a lesser amount that helps get an entrepreneur’s ideas off the ground, so they can attract more substantial investments after the business has proven profitable.
Seed funding usually comes from:
- Angel investors or venture capitalists
- Family and friends
- Crowdfunding initiatives
With the help of seed funding, a startup can become an established business.
Seed Funding Vs. Early Stage Funding
Seed and Early-stage funding are two different forms of capital for startups.
While both are necessary to get a business off the ground, there are some differences between the two.
Seed Funding:
- Pre-launch startup financing
- Low amounts of capital
- Generally used to start operations and launch products
- Early stage investors and people close to the founder typically provide seed funding
Early Stage Funding:
- Post-launch startup funding
- Series A and B rounds of financing
- Higher amounts of capital
- Generally used to scale operations and expand markets
- Early stage investors, VCs, and other sources of alternative financing typically provide early stage funding
Seed Funding provides smaller amounts of capital and helps a business get up and running.
Early Stage funding provides greater capital and helps a startup grow after it launches.
Both forms of financing are essential for any startup looking to get off the ground and make an impact.
Stages of Funding
Before we get to the practical part of how you can get hold of the necessary funds, let’s clarify the two types of seed funding.
In other words, the aspiring entrepreneur should know that, when seeking funding for your business, you will need to ask for money twice(!).
Pre-Seed Financing
As the name suggests, pre-seed financing is financing you acquire at the earliest stage of your fund collection process. Every seed needs water to grow, right?
To gather pre-seed finances, you must first build a product prototype, a proof-of-concept.
Your prototype isn’t just for showing investors — most of your funding at this stage will come from your personal savings, so you need to ensure you’re working on the right product.
As for securing external sources of pre-seed capital, the usual early business believers are:
- family members
- friends
- crowd funders
- incubators
- or angel inventors.
You’re pretty much on your own as this is the earliest funding stage, so be patient and persistent. That’s the only way to move forward.
Seed Funding
Once you’ve gathered the initial capital, you can move on to the next stage.
As we’ve discussed, seed funding is the financing stage when you look to expand your initial investments.
Now you take the funding you received in your pre-seed stage to the next level By relying on:
- Angel investors
- Crowdfunders
- Other entrepreneurs
- Or friends and family one more time. (Hopefully, they’re very generous)
At this stage, you’ll still be looking for an investor to join your business endeavor, but you already have some funds as opposed to none when you started.
What Do You Need to Seek Funding
Now that you know what early stage funding is, let’s look at some practical steps to help you find it.
An MVP (Minimum Viable Product)
A Minimum Viable Product (MVP) is the most basic version of your product or service. It contains just enough required features for users to interact and provide feedback.
Your MVP will help you gather feedback, test functions,
and gain market insights before investing heavily in a full-scale release.
When creating an MVP, consider the following:
- Early feedback from users
- User experience
- Visual appeal and design
- Functionality
- Simplicity of use
- Cost/benefit analysis
An MVP is essential when seeking early stage funding because investors want evidence that your product works.
Sales (Ideally)
Ideally, you should establish sales metrics before seeking early stage funding from investors.
Sales are an indicator of your progress toward profitability and provide evidence that there’s demand for your product.
Here are some things to consider when setting up a sales process:
- Pricing strategy
- Sales objectives and goals
- Target market and audience
- Distribution channels
- Promotion tactics
- KPI tracking & reporting
- Sales enablement processes and tools
Early stage startups often possess high enthusiasm and big ideas. Still, it’s important to remember that Investors are not just looking for great ideas.
They also need to see a strong strategy for monetizing and scaling the business sustainably.
A Good Pitch
Let’s say you’ve gathered a few contacts interested in your business.
They have the funds, you have the business strategy, and you’re one step away from obtaining your funding.
So, how can you secure the final agreement from the investors?
Here are a few tips for a good pitch:
- Emphasize the urgency — Make them anxious to start soon by proving your business has a high chance of bringing in top revenues. Show investors your business is a once-in-a-lifetime opportunity. Of course, mention they’re one of several interested parties.
- Show you understand the market — investors will gladly put their trust in someone who understands the market fluctuations as well as they do. Explain why it’s the best time to invest in your startup, considering the current and future market trends.
- Prove long-term profitability — Have a detailed plan ready with all financial estimates, especially how you’re going to cut future costs.
- Do these final negotiations on your own. It’s your business, and the investors wish to speak to the person in charge of the whole project— you.
Of course, securing funding isn’t the end of your entrepreneurial journey.
The beginning is difficult, and there are no guarantees. In fact, only 80% of startups continue their business after the first year.
But, armed with the knowledge above, you’re off to a great start.
Early Stage Funding Vs. Venture Funding
Understanding the early stage funding process is important, but it’s only one piece of the puzzle.
After securing Early Stage Funding, you may seek venture funding to keep your business going.
Early stage funding usually comes from angels, accelerators, and seed funds.
Venture funding comes from VCs who are much more active in their involvement in the company.
Early stage funding is generally easier to get, but venture funding provides more money and resources for your business.
How to Find Early-Stage Funding
So, you know about early stage funding opportunities, but where can you find them?
Here are a couple of strategies that can help you track early-stage investors.
Local Investors
Sometimes the funding you seek might be just around the corner (literally).
People might be more willing to invest their money in your business because you’re a local startup, not a foreign one.
You can look for these investors by
- checking out local business forums
- attending meet-ups
- or contacting local venture capital firms
Being located in the same city as your investors can inspire trustworthiness and a sense of familiarity.
Friends and Family
One of the most time-tested methods to secure early-stage funding is through friends and family.
While their funds may be limited, a pooled effort can have a surprisingly large impact. Having a base of early supporters helps demonstrate that your business is promising.
Investors often look for more than just financial backing; they also look for:
- experience
- influence
- demand for your products
- and relationships within an industry
Your early circles can help give you the edge you need when engaging with larger investors.
Don’t let the wide variety of choices overwhelm you.
You probably already have an investor or two in mind that you’d like to invite for a meeting.
Check out their LinkedIn connections. You’ll likely find investors similar to them.
Your Network
As a startup owner, you must get in touch with your colleagues.
Not everyone will hand you helpful advice, but talking to your colleagues can provide valuable information.
Try to learn the names of their investors. This can help you find investors who specialize in certain niches.
If they invest in your colleague’s business, they may also be interested in supporting your business.
Conclusion
Early Stage Funding can be a powerful tool for startup founders.
It helps them get the necessary resources to help them take off and launch their business.
But Early Stage Funding isn’t just about getting money; it’s also about understanding the investors, making an attractive pitch, and proving that your company is worth a chance.
Now we’d like to hear from you; have you had any experience with Early Stage Funding? What tips would you share with aspiring entrepreneurs? Let us know in the comments.