7 Stages in Startups-When is the best time to raise funds?
Updated: Oct 14, 2022
Startups are notoriously cash-strapped. They need to be, because they're new, and they don't have the same kind of financial resources that established companies do. But at some point, startups will need to raise funds to grow their businesses.
Some people think that this should happen as soon as possible—and there's no doubt that raising capital is a good thing. But many factors go into deciding whether it's the right time for your startup to raise funds.
The right time to raise funds depends on your business model, where you're at in your development process, and how much capital you'll need to grow. It is important to consider whether you have a product, market validation, and a clear path to profitability. If you have these things in place, then raising funds can be a good idea. It also depends on what kind of investor you're looking for and how much they can help you achieve your goals.
The biggest reason startups raise funds is because they need money to grow. Raising capital allows them to increase their operations and hire more employees. Most startups will raise money through angel investors or venture capital firms.
However, you must keep in mind that there are risks associated with raising money too early in the process. If you do not have any traction yet (like customers), then investors may not want anything to do with your business until it has proven itself through sales or revenue growth.
In this article, we'll look at some common scenarios that might help you decide when it's time to start raising funds—and when it may not be quite yet.
Table of Contents
Different Stages of Startup
Ideas have value when they solve problems for people who are willing to pay for an easy solution. Some startups have big visions for changing the world—but even these need a strategy for generating revenue at some point. You'll want to consider whether there is a large enough market for what you're creating so that it can become profitable in the long run.
Ideation is the stage when you have a set of ideas and are thinking about which ideas to pursue. It is an important part of the startup process because it is the time when you decide which direction your startup will go in. To decide which idea to pursue, you will have to do some market research and analysis on your idea. This can be done using tools such as SWOT Analysis, PESTEL Analysis, or by talking to potential customers and asking them for feedback. It’s important to do your research and see if the idea you have is in demand, or if it can be improved upon. There are plenty of entrepreneurs who have come up with an idea and then done the research and found out there was a better way to do it or that there was already someone doing it.
If you're looking for funding during this stage, it helps if you already have a business plan in place because investors will want to see how much money they'll make from your company if they invest in it later down the line when it turns into something bigger and better than what it is right now.
Here are a few examples of startups that got funded during their Ideation stage:
Aveda: They came up with a new idea for aromatherapy products and then did their research on how to market them.
Facebook: In 2007, Mark Zuckerberg received $500,000 in funding from Accel Partners for Facebook when it was still in its Ideation stage.
Prototype or Designing stage of the startup:
A business prototype is a model used to show the functionality and the potential of a product in a simplified form. It helps you to refine your idea, test it with potential customers, and gather feedback. A prototype can be a simple sketch, an interactive wireframe, or a functioning app.
The prototype stage is the most crucial part of a startup’s life cycle. It’s the moment of truth and often a make-or-break situation, where an idea becomes reality. A prototype is not only necessary to test the validity of your idea but also to evaluate how it will be received by different people.
Most investors are interested in investing in companies that already have a working prototype. They want to see how the product works, what the market fit is, and whether it has any potential to scale up. Having a prototype tells investors that you have what it takes to put your idea into action.
Of course, certain types of startups don’t require a physical prototype to get funded - for example, software startups. However, if you can build a working model then that’s great! It shows investors that you have the ability and determination to follow through with your plans.
You should be improving the quality of your product (or service) and at the same time finding more customers for it. The most important thing for you to do right now is to gather feedback from your users to improve your product even more. Your success depends on how well you listen to them and react accordingly.
The following are some of the examples of companies that got funded in the prototype or designing stage:
Snapchat: The startup was funded at $485 million, and it was an instant success. It is a messaging app that is used by millions of people throughout the world.
Uber: Uber is a taxi-hailing app launched in 2009 by Travis Kalanick and Garrett Camp. The company raised $1.2 million in seed funding from Benchmark Capital, First Round Capital, and several other investors.
Product Development or Technology Development Stage:
This is the stage where an investor will be involved before the startup has proven that it can successfully run. They need funding to research and build out their product as well as find and develop talent to build their company. The company may have submitted a patent application to protect its intellectual property. These companies are at extremely high risk because they can still fail at this point, but there is also the possibility of large returns if they succeed in becoming a successful company.
Companies in the product development or technology development stage are characterized by the following attributes:
1. These companies have a technological idea that is unique and well-differentiated from other products.
2. These companies are developing a product/technology and need funding for proof of concept.
3. These companies are typically founded by technologists and lack marketing, sales, or customer development expertise.
4. Investors invest in these companies after seeing the potential of the technology or product to develop into a large business.
5. The investment amount is low, typically ranging from $100K-$1M per round, but there can be higher investments if the product is highly differentiated.
6. The valuation of these companies at this stage is usually between $0.5M to $2M based on the investment amount raised and the potential of the technology or product being developed.
7. Investors will typically have an option to convert their investment into equity later as the company develops further, either through another round of financing or when it gets acquired/IPO (i.e., liquidity event).
Examples of companies that got funded in the product development or technology development:
Shazam - The music ID app got its first round of funding when Apple CEO Steve Jobs heard about and tested out their working product. Within months they were able to raise $1 million in seed capital.
Twitter - Twitter was born into this stage of the startup world. It was founded as a podcasting company, but the founders quickly decided to switch over to microblogging after seeing how popular the platform was with its users.
Proof of Concept stage (POC):
The Proof-Of-Concept (POC) stage is also known as "the minimum viable product" (MVP). It is about testing your idea and validating it through the execution phase. You need to make sure that what you are going to build is something that people want and can use.
The best way to test your idea is to use mock-ups and prototypes instead of actual products because they are cheaper and quicker to make and easier to change if needed.
Once you've built your product, you need to find people who will use it and give them feedback on how well it works. This process is called testing or beta testing. You must test your product before releasing it because there might be problems with the design or functionality which could affect sales later.
You can test your business idea in five ways:
1. Create a prototype.
2. Interview users to get feedback on the prototype.
3. Test assumptions with surveys and questionnaires.
4. Conduct focus groups for more qualitative feedback on your product/service/business model (this is also called Customer Development).
5. Build an MVP (minimum viable product) and launch it online or in person so that people can buy it from you directly if they wish to do so (or if you want them to pay for it before your final product is ready).
In this phase, you should be able to answer some of the following questions:
Are people going to use your product?
Does it solve a problem? (Use case)
What are the steps involved in using this product? (User flow)
What would be the revenue models for this product?
Examples of companies that got funded in the Proof-of-Concept stage:
Caterpillar Inc., which was founded in 1925, raised money from angel investors at this stage. Caterpillar's first product was a tracked tractor for moving dirt and rocks during construction projects. It then became one of the largest manufacturers of mining equipment, construction machines, and diesel engines in the world. In 2017, Caterpillar had sales of $47 billion worldwide, employed around 100,000 people, and had operations in 165 countries around the world.
Actual Product Launch Stage:
It is the stage when a company releases its final product to the market and starts selling it. The main objective of this stage is to establish a brand name and gain traction with customers.
This phase also involves scaling up production, increasing sales figures, and generating profits for the investors. There are three main ways in which startups can scale up their operations:
Increasing production capacity: Companies can increase their production capacity by hiring more workers or purchasing more equipment. This ensures that you have enough stock on hand to meet customer demand and avoid running out of inventory.
Increasing marketing efforts: Marketing campaigns are designed to attract more potential customers and drive traffic towards your website or app. These campaigns include social media marketing, content marketing, and search engine optimization (SEO). A good example would be Facebook Ads which allows businesses to target specific audiences based on their interests, demographics, and location among other factors.
Adding new features: Adding new features helps startups improve the user experience, increasing conversion rates, and revenue generation.
Pivoting and Relaunching: This is the time when you will get feedback from customers and may need to make changes to your product based on their feedback. If the product fails, then you need to pivot it and relaunch it.
If your product is software, then it will take some time to be fully functional and easy enough for users to use it.
If you have made any changes to your product, then you should release an updated version of it so that everyone gets the updated version.
You can also make some changes in your business model if needed at this stage.
Here are some examples of companies that got funded in this stage:
Buffer – Buffer was launched in September 2008, but it wasn’t until April 2009 that they were able to raise $250,000 in funding.
Instagram – Instagram was launched in October 2010 by Kevin Systrom and Mike Krieger, but they didn’t receive any funding until April 2012 when they raised $500,000 from Benchmark Capital and Baseline Ventures.
Early Revenues Stage
The early revenues stage of a startup is when a company makes its first sale and begins generating revenues. The early revenue stage can be the most exciting part of any startup, as it’s when founders first see what their vision looks like in practice. But it can also present some of the biggest challenges, as startups are still figuring out how to sell their products and services.
The early revenue stage is typically followed by an infusion of capital — often from outside investors — that allows founders to expand their operations and reach new customers.
Early Revenue Stage Challenges:
The biggest challenge facing early-stage companies is scaling up while staying lean and efficient. Early-stage companies must spend money on marketing and other expenses to generate sales, but if they try to grow too quickly, they risk burning through their cash reserves before they’re able to secure additional funding from outside investors or venture capitalists.
How To Succeed in The Early Revenue Stage
One way for startups to successfully navigate this stage is by developing a repeatable sales process that delivers consistent results — even if those results are modest at first. Even though sales may start slow or inconsistent, every sale that happens helps build momentum for future sales efforts, which makes it easier for founders.
Early Revenue Stage Goals
The goal of the early revenue stage is to build the foundation for future growth by:
Creating a repeatable sales process that can be scaled across multiple channels (e-commerce, wholesale).
Establishing pricing that covers operating expenses without requiring the additional investment of capital.
Generating Customers, making sure they pay for what they use and converting the early adopters into paying customers over time by giving them incentives.
Cutting costs aggressively wherever possible — even if it means getting rid of things like free meals or office perks — if they don't affect the quality or team morale too much (or at all). This will help preserve cash.
Examples of companies that got funded in the early revenues stage are:
Dropbox - Drew Houston started working on Dropbox as a side project while he was running another company, Cloud On. He put up a website so people could sign up for free accounts and share their files online. He got 100,000 users in two weeks and realized he had something big on his hands. In 2007 he left Cloud On and started working full time on Dropbox. It took off like wildfire with over 25 million users today (plus another 50 million using its mobile apps). In March 2013 Dropbox raised $250 million at a $4 billion valuation from Sequoia Capital after having raised just $7 million before that point.
The scaling stage of a startup is the period when a company begins to grow rapidly and reach its full potential. This stage can be challenging for startups, as they need to keep up with the increasing demand for their products or services. It may also be facing increased competition from larger companies that are trying to enter its market.
Scaling also means hiring more people and scaling up operations to keep up with demand. This often involves moving into larger offices, hiring more employees (and paying them), and getting all the necessary equipment needed for large-scale manufacturing.
In this phase, startups focus on expanding their business by:
Adding new features and products.
Increasing sales channels and partnerships.
Increasing marketing efforts.
Acquiring competitors or other companies that offer complementary products or services.
Merging with another company to gain access to new markets.
Here are some examples of companies that got funded in the Scaling stage:
Zepto, the commerce startup delivers groceries in 10 minutes. After 9 months of entering the market, it has increased its revenue growth by 800% and reduced burn down by 5X on a per-order basis. It raised $200 million led by Y Combinator to scale up its delivery services beyond metro cities. The startup is now valued at $900 million.
The Fit App is an online fitness community that helps people find workout partners and compete against each other during exercises like running or weightlifting. The Fit App raised $10 million in a Series B round led by Insight Venture Partners (IVP) in December 2018. IVP previously invested $24 million into The Fit App back in September 2017 when it was still in the Idea stage.
The startup world is one of the most dynamic and unpredictable industries. While there are no set rules, there are certain key pointers that entrepreneurs can follow to make the right decisions.
The first thing that comes to mind when someone says “fundraising” is a pitch deck, a PowerPoint presentation, and a huge round of funding. But the process is way more complicated than that and involves a lot more than just money.
You can’t just go out there and start asking for money from people who have never heard of your brand before. You need to build credibility and prove that you can deliver results. That’s why before raising funds, entrepreneurs should take time to think through their idea and execute it on time so they can showcase their performance metrics and show investors that they can do what they say. Investors want to see a clear path for profitability so that their investment makes sense and pays off over time.
To understand more about how to do Pitching read our blog