Raising Capital

Understand your venture stage.

There are five key stages that startup ventures typically progress through.

Raising capital is one of the most critical challenges when building a startup. How well-prepared are you as a CEO to pitch your magical company? Are you aware of the startup funding stages or funding rounds? Every venture is different, and the various venture stages can vary somewhat, but generally speaking, there are five typical venture stages for early-stage startups.

1. Family and Friends Inception Round:

Characteristics

When in this stage, you (as the founder) are expected to use your own saved capital (if any) in addition to investments from Family and Friends as you start building your first product/service. You may have been able to secure some startup grants and state-sponsored soft loans. It could be worth applying for incubators to help you with basic support like an office, meeting spaces, and networking to find additional team members and advisors.

Amount to raise: $25-100k
Pre-money valuation range: $50-$1m


Key Milestones: 

  • Team knowledge & passion for solving a big problem
  • Proof of a Big Total Addressable Market (TAM)
  • An idea of a strong Business Model with low cost to proof/test

Prerequisites:

Ventures at this stage are expected to have their product reach MVP or Beta product or at least have created designs of the offering. 


2. Pre-Seed:

Characteristics:

Pre-seed capital helps you establish the base of your startup, validate the business model, and pay initial costs. You should now be able to leave your current job and set the foundation for the next funding rounds that will follow.

At this stage, you are typically approaching early stage Business Angels who believe in you as founder(s). You can also seek additional funds from Family and Friends, and it is also seen as a positive if you can dip into your own saved capital to some degree. Don’t forget to explore startup accelerators, grants, and state-sponsored soft-loans beyond angels.

Amount to raise: $100k-$1m
Pre-money valuation range: $1m-$4m


Key Milestones: 

  • Team knowledge
  • Fast first product/solution development
  • Early customer/user success with first product/solution
  • Early take-up and NSP (Net Promoter Score) score
  • Inexpensive customer acquisition
  • Users sharing experience with community

Prerequisites:

Startups at this stage can show a growing user base of their first product/service. The Annual Recurring Revenues (ARR) is usually up towards $300k with an annual growth rate of between 300% and 500% and gross margins of 50%+. 

3. Seed:

Characteristics:

Product-Market Fit (PMF) is now within your reach but needs more cash to accelerate.  At this level, you can raise funding from institutional Seed Investors (very early stage VCs, Corporate VC-CVC, or Family Offices-FO) or a syndicate of more professional Angel investors. 

You can still apply to incubators or accelerators and also seek grants in some regions. You may also consider raising working capital debt (overdraft facilities) and apply for government-sponsored soft loans.

Amount to raise: $1m-$4m
Pre-money valuation range: $4m-$12m


Key Milestones: 

  • Product iteration frequency
  • High level of early customer/user engagement
  • Clear definition of Ideal Customer Profile (ICP)
  • Early view to market edge based on unique assets/innovation


Prerequisites:

Startups at this stage can demonstrate increased “must-have” functionality with fewer users churning as you are solving a real problem. The Annual Recurring Revenues (ARR) is usually up towards $300k-$1m with an annual growth rate of between 300% and 400% and gross margins of 50%+. 

4. Series A:


Characteristics
:

You have real traction with customers actively engaging and using your product to solve important problems! There is a high degree of user retention and decreasing churn numbers. These signs are also referred to as reaching Product-Market Fit (PMF). This means that you need to raise a Series A round to boost your ability to scale out sales and marketing by strengthening the team with seasoned executives. Your investment thesis is based on these early signs of a scalable business with the assumptions that you and your team can level up. Approach Institutional Investors (VC, CVC, and Family Offices) and Super Angels/Syndicates that add advisory value. Consider raising venture debt to spare your equity and put more cash to work to grow the company even quicker.

Amount to raise: $4m-$10m
Pre-money valuation range: $15m-$30m


Key Milestones: 

  • Net Revenue Retention trending >100% (including up/cross-sell)
  • Customer retention count >90% (B2B) and >60% (B2C)
  • Demonstrable Network Effects (ideally!)
  • First signs of brand success
  • Realization of market edge


Prerequisites:

Startups at this stage can demonstrate a predictable and scalable business model with improving unit economics (e.g., decreasing Customer Acquisition Cost-CAC and increasing Lifetime Value (LTV). The Annual Recurring Revenues (ARR) is usually in the range of $1m-$3m with an annual growth rate of between 200% and 300% and gross margins of 60%+. 

5. Series B:


Characteristics:

You are now in a scaleup stage with solid proof that your business model produces repeatable sales and shortens sales cycles, leading to predictable revenues. Your unit economics and financial metrics are continuously improving as you are optimizing your sales machine to deliver more revenue per invested resource. You see a high degree of Net Revenue Retention of >110% and early signs of reaching escape velocity and category leadership. You are now ready to raise a Series B round to scale up your organization to a new level of maturity. Your investment thesis is more data-driven compared to Series A.  Again, you will be approaching Institutional Investors (VC, Corporate Venture Capital-CVC, and Family Offices-FO) and may even see interest from Growth Equity players. You are in a position to raise venture debt and term loans to avoid unnecessary dilution.

Amount to raise: $10m-$25m
Pre-money valuation range: $40m-$100m


Key Milestones: 

  • Net Revenue Retention trending >100% (including up/cross-sell)
  • Customer retention count >95% (B2B) and >70% (B2C)
  • Demonstrable Network Effects 
  • First signs of brand success
  • Early escape velocity experience


Prerequisites:

Startups at this stage can demonstrate a predictable and scalable business model with improving unit economics (e.g., decreasing Customer Acquisition Cost-CAC and increasing Lifetime Value (LTV). You should improve gross margins as a leading vendor candidate where your pricing is driven by quality and value. The Annual Recurring Revenues (ARR) is usually in the range of $3m-$10m with an annual growth rate of between 100% and 150% and gross margins of 70%+. 

The following summarised the above five venture stages with Investor Level, Funding Asks, and Typical Investors


Some more guidance on Investor Profiles 

When we talk about various investors that invest in the above five stages, the following are some guidelines so that you understand the main differences :

Business Angel Investors (“Angels”)

Wealthy individuals invest in startups in their early stages of development or seed round of fundraising and sometimes even in Series A. Due to the inherent risk of loss of capital or significant dilution in subsequent fundraising, angel investors typically pursue investments with returns that they believe may have the potential to return multiples of the initial investment. They operate solo or in smaller groups/syndicates.



Accelerator

A program that provides mentorship and the capital necessary to accelerate the growth and success of young startups. Typically, the program will provide some capital and take an equity stake in the startup exchange. Accelerator programs usually last three to six months (instead of incubators, which have more extended periods). They help startups that are already performing, scale-up, and create the organizational framework they’ll need to thrive. Accelerators will bring a cohort of start-ups into what is typically an on-site program. At the end of the program, companies will ‘graduate’ from the accelerator program and present their company to potential investors at the respective accelerator’s Demo Day.

Venture Capital Investors (VCs)

Venture Capital firms invest in startups at various stages, ranging from seed to Series A and beyond. Venture Capital firms take equity in exchange for capital, seeking to invest in firms. from the earliest stage Series A to later stages as the company grows. Venture firms typically lead only a single round and cede to other investors for the next round to avoid conflicts of interest in pricing the next round. Venture capital generally comes from a group of partners who set up a VCs firm and raise several capital funds from Limited Partners (LP), such as sovereign wealth funds or mutual pension funds. The main downside for the entrepreneurs is that the VC investors usually get 25-50%+ equity in the company, and, thus, a say in company decisions.

Family Investment Office or Family Office (FO)

A family investment office is a fund of an ultra-high-net-worth investor family. They typically make investments from Seed onwards to Series A and above as co-investors. It happens that FOs also lead Seed rounds.

Corporate Venture Capital (CVC)

Corporate investments come from private or public companies, rather than a venture capital firm. The money comes either from their balance sheet or through a separate Corporate VC fund (CVC) where the single LP is the corporate entity. These are often, though not necessarily, done for the prime purpose of forming a strategic partnership and secondary for pure financial returns.

Summary

In summary, depending on your venture stage above, the emphasis will be on different parts of the business. In the very beginning, it’s mainly about the founders' deep domain expertise and unique insights into solving critical customer problems in the early inception or ideation stage where Family & Friends (and Fools!) are willing to place a bet on you and your vision. Founders at this stage need to paint a future where there is a real opportunity to solve a big problem addressing a potential $1bn+ market!

The next venture stage is to have tested and verified your first solution with real customers, demonstrating demand and willingness to pay. With that achieved, the focus moves from the founders’ capabilities and ideas to more attention on the actual metrics of a validated business model that can attract a pre-seed funding round. You could argue that  this is the first real external investment where early stage business angels get involved. 

After this stage, the business needs to evolve even more to provide some early indication that your “mousetrap” actually works and could be repeatable.  It is often referred to as the path to reaching a Product/Market Fit (PMF) and should attract seed investors in one or a few seed+ rounds. Usually this would involve more of a syndicate of angels, institutional investors or maybe accelerators that will provide coaching and growth support. 

Once this PMF is achieved, you have sufficient proof that you are solving a painful problem or creating a delightful experience, where people are coming back for more in a predictable way. You can also show unit economics that point to a healthy relationship between how much money it takes to acquire new customers (CAC) and how much net profit each customer delivers over an expected lifetime (LTV). This stage will then attract institutional investors, possibly together with some larger angels (or syndicates) in what’s referred to as a Series A round. 

The next evolutionary stage is where you can seriously scale your venture by adding more cash into building out your sales and marketing capacity across many more geographical or vertical markets (depending on the industry and location). Again, metrics are central at this stage, as is the ability to hire more experienced talent that knows how to build a big company. This would be considered a Series B funding level where institutions would be expected to participate with your existing Series A investors. 

Understanding these guidelines on what each of these five venture stages mean, will hopefully make it easier for you to understand how you prepare to become investor-ready and the prerequisites that must be in place. 

Knowing what venture stage you are at also helps you to approach the investors that fit your particular startup so that you are not wasting your or your investors’ time.


Good Venture Luck!

Thorgeir