External funding is essential for the success of a startup. During the process of creating an emerging company, the different stages it goes through require specific types of financing to address its needs. Avoiding the most common mistakes in funding rounds is key to the success of a startup. That’s why we are going to discuss the funding stages according to the startup phase, the type of round, the amount it covers, the type of investor, and the purpose of each stage.
The Pre-seed stage is the most initial phase of a startup, where there is only an initial idea without a defined business model. The main objective of this stage is to create a business model, and the company’s pre-money valuation typically does not exceed one million euros. The most common type of investor in this stage includes Business Angels, Public Funding, Accelerators, and Incubators.
In the Seed stage, the business model is already defined and starts to yield results in the market. The startup’s objective in this stage is to focus on growth and obtain metrics that confirm it and serve as a channel for attracting investors. In this stage, investors with financial objectives aligned with the project are sought, as they contribute to the development of the startup in the subsequent growth stages. The most frequent investors in this stage are Business Angels, Public Funding, Accelerators, and even FFF (Family, Friends & Fools). The average valuation is 1.7 million euros, the dilution is 15%, and the startup should have between 12 and 18 months of runway, meaning the time it can survive with the captured funds.
The Late Seed stage, Pre-Series A, or Bridge Round occurs when the startup has completed a Seed stage but hasn’t achieved the expected financial goals in those 12-18 months. Therefore, it resorts to this type of bridge round. The financial objective is to scale metrics and increase the team (HR). The average round size is 850,000 euros, the Pre-Money valuation is 3.3 million euros, the dilution is 21%, and it takes 6 to 9 months to close a round of this type.
The Early stage is when the startup has high growth potential, and its profits exceed the losses, so it needs a Series A and Series B funding round. One of the main forms of financing for startups in this stage is through Venture Capital, a financial operation in which capital is provided in exchange for a percentage of the company. The startup’s objective is to scale metrics, demonstrate attractive profitability to investors, and expand the team. In Series A, between 1 to 5 million euros are required to continue the project, and in Series B, from 6 to 20 million euros are needed to boost the startup’s growth. The goal is to generate an operational cushion of at least 6 months, and the equity in these rounds ranges from 5% to 10%.
The growth stage of a startup, known as the Growth Phase, is characterized by a higher maturity in the company, which has positive numbers and a defined strategy for expansion. During this phase, the main objective is to increase both profits and the number of customers. To achieve this purpose, a funding round known as Series C is used, in which external investment plays an important role. In general, Large Funds such as investment banks or private equity firms are the main providers of funds in this phase, offering up to 20 million dollars. One of the most recent cases of a Growth round in Spain is Cabify. In March of this year, it raised over 100 million euros in funding to accelerate its strategic plan focused on the company’s growth in the markets where it operates, both in Spain and the six Latin American countries: Argentina, Uruguay, Colombia, Peru, Mexico, and Chile. It will also promote fleet electrification in Spain and Latin America and drive technological innovation. This round was led by Orilla Asset Management and AXIS, among others.
In this stage, the startup aims to consolidate its position in the market and expand its presence nationally and internationally. Additionally, the company may also focus on developing new products and services that allow it to diversify its offerings and increase profitability.
It is important to note that the Series C round is considered one of the last financing stages before an IPO or acquisition of the company by another company. In this sense, the company must demonstrate high growth potential and a clear and effective strategy to attract investment from Large Funds.
In summary, the Growth Phase represents a crucial stage in the life of a startup, where the focus is on consolidating the company, increasing profits and the number of customers, and preparing for a possible IPO or acquisition. The Series C funding round is essential to achieve these objectives, and the investment from Large Funds is a key factor for success in this phase.
Written by Alejandro Pérez-Ocho, Associate at Closa
