How to fund startup | How To UK|

Summary

This video outlines the various funding phases for a startup and how they align with a venture capitalist's investment cycle. It covers seed funding, round one and round two funding, the expansion phase, and the IPO or sale stage. Entrepreneurs are advised on when to seek funding based on the VC's lifecycle, with tips for approaching investors at the right time. The video features examples like Neptune, SquareTrade, and Twitter to illustrate each phase, highlighting the critical milestones needed to grow a successful startup and achieve a profitable exit.

Takeaways

• 😀 Seed funding comes from personal savings, angel investors, or crowdfunding to solidify a team and business plan.
• 😀 Round 1 funding is when venture capitalists invest a portion of their funds into a range of companies for long-term returns.
• 😀 For Round 1 funding, it's crucial for entrepreneurs to gain attention and secure investments early in their business journey.
• 😀 Round 2 funding occurs around 3 years in when VCs reassess their investments and inject more funds into successful startups.
• 😀 Startups typically seek expansion funding from subordinated debt or preferred equity instead of VCs in their 3-5 year growth phase.
• 😀 The expansion phase (3-5 years) is when companies push past the funded stage and aim for stability and growth without relying on VCs.
• 😀 In the IPO or sale phase (5-10 years), venture capitalists look for their payday as the startup either goes public or is sold.
• 😀 A successful IPO or sale can yield venture capital firms up to a 700% return on investment for companies that go public.
• 😀 Many startup investments won't make it to the IPO/sale stage, with VCs seeing returns primarily from those that succeed.
• 😀 The key to wooing VCs is to ask for funding at the right time, aligned with their investment lifecycle and priorities.
• 😀 Venture capitalists start funding when they agree to commit to long-term investments, often not seeing returns for up to 10 years.

Q & A

What is seed funding and who provides it?

Seed funding is the initial capital used to start a business, and it typically comes from the entrepreneur's own bank account, angel investors, family members, or crowdfunding platforms like Kickstarter.

What does seed funding help a startup accomplish?

Seed funding helps a startup solidify a talented team and develop a business plan, which is essential when seeking future funding from venture capitalists.

What is Round One (Series A) funding, and who invests in it?

Round One, or Series A, funding is the first significant investment from venture capital firms. VCs pool money together and invest one-third of their funds into various startups at this stage.

At what stage of a startup's development is Round One funding typically raised?

Round One funding is typically raised when a startup has a promising business idea and is looking to gain traction. It occurs after seed funding, usually in the early stages of the company’s growth.

How much funding did SquareTrade receive in Round One?

SquareTrade raised $238 million in Round One funding from 11 different venture capital funds.

What is the purpose of Round Two (Series B) funding for a startup?

Round Two funding is used to continue the growth of a startup if it has shown promise. At this stage, VCs will often weed out unsuccessful investments and focus on funding companies that are doing well.

Can a startup receive additional funding after Round One? If so, what is this phase called?

Yes, a startup can receive additional funding after Round One. This is called Round Two or Series B funding, which is used to further expand the company.

What kind of funding is involved in the Expansion phase of a startup?

In the Expansion phase, funding typically comes from subordinated debt or preferred equity. This phase helps push the startup beyond the initial funding stages into the growth phase.

At what point in a startup's lifecycle does the Expansion phase occur?

The Expansion phase usually occurs when a startup is 3 to 5 years old and is approaching profitability. This phase focuses on securing the resources needed for long-term growth.

What is the typical outcome for a startup after the IPO or Sale phase?

After the IPO or Sale phase, a startup either goes public or is sold. Venture capitalists often see significant returns, sometimes as high as 700%, especially in successful IPOs.

What happens to the venture capitalists' investments if a startup does not make it to the IPO or Sale phase?

If a startup does not make it to the IPO or Sale phase, many of the venture capitalists' investments will fail, resulting in a loss. However, successful investments can lead to substantial profits.

How does a startup determine the right time to ask for funding?

A startup must align its funding needs with the VC lifecycle phases. The right time to ask for funding is when the startup has reached the appropriate stage of development, such as having a solid business plan for seed funding or demonstrating growth for later rounds.