Considering becoming an Angel Investor? Let’s cover one of the key things you need to know — the stages of a startup.
Startups raise capital in phases, commonly referred to as “rounds”. Startup fundraising rounds are where investors get a lot of capital together and invest in the startup at once. Each fundraising round is generally associated with a new stage in a startup’s development, and is often tied to a valuation event (how much the company’s worth). This article will highlight stages that are the most important for angel investors to understand.
While this article outlines the common benchmarks for startup stages, there are exceptions and these amounts may change as the startup landscape is constantly evolving.
Angel Hacks is a series which focuses on one key startup topic that new Angel Investors need to know, in under 5 minutes. You can read the first “Angel Hacks” post here: Angel Hacks: Deal Flow.
Stages
Ideation Stage
The founder has an idea written on a napkin however there is no product yet. At this stage there may not be a co-founder and the company is still establishing themselves (going through incorporation et cetera). All of the shares in the startup are given to co-founders.
During the ideation stage startups generally fund themselves through “bootstrapping”, where they use their own money such as savings and loans in order to build their company, or through friends and family, which are small amounts raised from their close friends and family. The size of investments at the ideation phase are generally below $200k.
Pre-Seed Stage
The founder has brought their idea to fruition and will most likely have developed a Minimally Viable Product (MVP), which is a version of the product that may not have all the features desired and is less technical. At this stage, the founding team is more established however may still be seeking essential hires to continue to build their company. Idea validation should have started with any customers they have however the startup is not generating revenue.
At this stage the startup is raising money through Angels, or early-stage VC firms (like SV Angel), and funding will be granted using SAFEs (Simple Agreements for Future Equity) or convertible notes. The size of pre-seed investments are generally below $1M.
Seed Stage
The company should have developed an MVP and have customers testing the product. If the company is B2B or developing a product in industries like Hardware, Drones, and HealthTech, a full product generally does not exist (due to costs for hardware, regulatory costs, and clinical testing by the FDA for HealthTech products). The company’s founding team has padded out and now has the employees they need to continue to scale their company.
The company should show signs of traction, through either strong milestones which have been met, revenue being generated, or user statistics (Daily Active Users (DAUs), Monthly Active Users (MAUs) et cetera). At this stage the startup will be raising capital from early-stage VC firms, syndicates, and Angels through SAFEs and convertible notes, as well as equity rounds via term sheets).
Seed 2 (II), Bridge Financing
This stage generally refers to startups who have raised a seed round, and require additional capital in order to be able to meet the required milestones to reach a Series A round. Seed II rounds are not very common however it’s still important to know they do exist.
At this stage early-stage investors, Angels, and syndicates will be investing in the startup through either convertible notes or SAFEs. The size of Seed II rounds is generally $1M to $3M.
Series A
The company should have achieved strong product-market fit, and exhibited strong traction and growth, either by meeting milestones in product development, strong revenue, and/or customer engagement (strong customer retention, users spend a lot of time using the product and low user acquisition costs (UAC)). Companies will be seeking additional capital to help scale their customer/user base and increase revenue.
At this stage capital is raised through either larger Angels who have invested in previous rounds, early-to-mid VC firms, and capital will be raised through an equity rounds via a term sheet. The size of a Series A round is generally $3M to $20M.
The following stages are added for reference and do not apply to angel investors:
Series B+
The company should have been able to demonstrate highly measurable results (repeatable growth engine, growing market share, strong revenue, strong customer retentions, and growing user amounts), and are focused on scaling their internal team and achieving market domination. Subsequent rounds are labelled as Series D, Series E et cetera and generally are spaced between 18–24 months apart.
As an angel, your work will be focused on the earliest stages of the company and you will not participate in rounds of this size.
I hope you enjoyed reading this article and that it gave you some insights into the financing stages of a company. If you have any questions regarding Demo Days, tweet me @jamesstewartvc or shoot me an email at james@thedisruptivevc.com and i’ll get back to you soon.