People think that venture capital is a very complicated concept that doesn’t affect everybody. However, let’s make an experiment. If you open your phone and look at the apps you installed on it, we bet that at least one was built and then marketed by using venture capital. The last few years have seen an astounding raise when it comes to the money that goes into startups. For this reason, today we are going to focus on the seed funding startup stages and see what are the differences between them.

Seed Funding Startup Stages 101

Before getting down to explain what each step is about, it’s important to mention that there is no universal model. However, most companies tend to follow the same pattern, so it’s easy to identify 5 main seed funding startup stages:

1. Seed Capital

Just like the name says, this is the stage where the startup gets the money to fuel it down the road. Now, the leaders of the startup may not offer any products for sale. Instead, at this point, their goal is to convince the investors why their ideas deserve some VC (venture capital) support. It represents the earliest source of investment. Usually, it’s made up of:

  • Friends and family;
  • Credit cards;
  • Crowdfunding;
  • Personal savings, etc.

All the money raised in this way goes into research and development for the initial product. You can also use the money to conduct a market research or to expand your team. Besides, there are also some seed accelerators, whose goal is to accept applicants, offer them seed capital and an opportunity to bring a demo to major investors.

2. Startup Capital

The second stage is quite like the first. After you have your market analysis done, and you’ve finished your business plans, you can market and advertise the product. Naturally, the goal here to acquire as many customers as possible. By this time, you should have at least one sample product available. Now, the VC funding may be used for hiring people in management, conducting some extra research if needed, and fine-tuning the product or the service you are offering.

3. Second Stage/ First Stage/ Early Stage Capital

Many people call this the first stage, while others refer to it as the second or the early stage capital. However, regardless of the name, the third of the seed funding startup stages comes after the seed and startup ones most of the time. The funding you receive at this moment often goes into manufacturing and production facilities. Moreover, now is the time to invest in more marketing and sales.

Naturally, in this stage, the amount you (or somebody else) invest more than in the previous seed funding startup stages. The company is also moving towards being more profitable at this moment, pushing its products on the market and advertising them to a larger audience.

4. Third Stage/ Second Stage/ Expansion Stage

Once again, the name used for this stage differs from business to business. However, regardless of how you choose to call it, this is the point where growth is often exponential. Consequently, VC funding turns into a fuel for the fire, instead of a seed. It enables the expansion on other markets, such as other cities or countries, it diversifies, and it differentiates the product lines.

Now that the company already has a commercially available product, the startup should be getting large revenue, if not profit. Most of the companies that receive expansion funding have already been in the business for 2 – 3 years.

5. Bridge/ Mezzanine/ Pre-Public Stage

This is an important point in the company development, and the company may want to go public at this stage. Now, the products and services it offers have already found suitable traction. The funds you get here can be used for various activities:

  • Financing an initial public offering;
  • Merging and acquisitions;
  • Cutting down prices or other measures that drive out competitors.

If everything goes as planned, the investors can sell the shares they have and end any collaboration with the company after they have a generous return. If you look at the tech IPOs, such as Yelp, Twitter, or Facebook, this stage was possible only after years of VC funding. The latter helped fuel both user and revenue growth. Remember that no financing is free, and the VC funding of the apps or services we were talking about in the beginning is the perfect example.

seed funding startup chart

Chart showing an alternative hierarchy of the seed funding startup stages. Image courtesy of Marnix Groet

Business Accelerators

Now that we discussed the seed funding startup stages, it’s time to delve a little into the business accelerators as well. We already mentioned them in the description of the first stage, but they deserve a little more attention. They’re also called seed accelerators, as we explained earlier. It’s important to know they’re different than the traditional business incubators. A startup accelerator is cohort-based and fixed-term, including mentorship and educational elements. They usually culminate with a demo day or a pitch event.

Meanwhile, the traditional business incubator is funded by the government, most of the time. They don’t take any equity and focus on certain industries, such as biotech, medical technology, financial or clean technology, etc. At the same time, accelerators accept either private or public funding and tend to focus on a variety of industries. The good part is that anyone can apply to a business accelerator, but they can get quite competitive.

Conclusion

Even though there are no fixed stages through which a startup needs to go for financing, there are five steps that are common to most businesses, as we explained above. From pitching the idea to various investors and raising the funds for creating the product or the service, there are various steps a business entrepreneur needs to follow.

Even though the stages may seem clear on paper, you need to keep in mind that they might not be just like that in real life as well. It may even take years until you reach the final stage, for example, but if you do it rightly, the results will appear at the right moment.

Main image source: depositphotos.com

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