Business Funding // A Guide to Understanding the 5 Stages

Business Funding // A Guide to Understanding the 5 Stages

Business idea? Check. Team? Check. Ideal Office Space? Check. Funding??

Do you find yourself ready, and rearing to launch your business, but you simply do not have the capital? Have you run your business for a while, would like to the next level but not sure which stage of potential business funding you are in?

For anyone with an entrepreneurial spirit, owning your own business is the ultimate goal. You probably have dreams of saving enough money to eventually become your own boss. But life (and bills) happen, and your dream seems to be, well, just a dream.

Don’t let this financial barrier get in the way of learning how best to acquire business funding. But first things first, what type of funding will you need?

Arm yourself with proper knowledge and you will be one step closer to realizing your aspirations.

Types of Business Funding

Funding falls into 5 distinct categories, each based on the level your organization is at, and your specific monetary needs.

This table shows the different stages of funding and as we aim to help start-ups and small businesses grow, here is our comprehensive guide on everything you need to know:

Pre-Seed Funding

This is the earliest stage of funding a new company and is not generally included as part of the 5 stages of funding. This is because it occurs at the very beginning of a company’s inception when the founders are initially getting their operations off the ground.

According to Investopedia, Pre-Seed Funding, “pre-seed” funders are usually the founders and are supported by friends and family.

Also known as the 3F’stage – Friends, Family, Fools’, the business has nothing to show, and founders rely on personal relationships to attract investors.

Family and friends who care for you are more likely to take the risk of investing without asking for equity in the company.

Fools as they are good-naturedly referred to, are those investors willing to give funds to potentially risky business ideas, without any proof of success. These investors can stand to gain or lose huge amounts depending on how well the company does.

A prime example of the success that pre-seed funders can achieve is evident in Sequoia Capital’s pre-seed investment in Airbnb of around $600,000, paying just $0.01 per share.

12 years later, Airbnb shares are trading at over $200 each, despite the Covid-19 pandemic spreading havoc in the tourism industry. It’s safe to say the directors of Sequoia are laughing all the way to the bank.

To succeed in this stage, you will need to sell the concept of your business, as you cannot yet say – “Here’s a tried and tested business that will definitely earn you money.”

You may not even have an office space yet – hence the need to find an affordable office to let. Nairobi is usually the go-to business hub in East Africa, so a shared office minimizes costs related to furnishing and maintenance, especially if you do not need a permanent office in the beginning stages.

Nairobi Garage offers the ideal base from which to conduct meetings, and also provides desk space to regroup as investors show interest, and you move on to official seed funding.

So, what exactly is seed funding?

Seed Funding

Seed funding is usually the first substantial flow of capital into the business. It is used to develop products, and execute a go-to-marketing strategy.

The start-up will have little to no revenue, and funds are channeled towards hiring staff, purchasing equipment, and office space.

One way for small businesses to make the most of the funds they receive during this stage is to opt for office rental. Nairobi Garage is one of the top spots for hot-desking, especially for companies looking to break into the African market, without the hassle of organizing their own offices.

It is also possible to get funding from angel investors to bridge the gap between the 3F’s, and more formal venture capital funds. They are open to riskier ventures but will also require an equity stake in exchange for their investment.

After raising enough business financing; the business will either fail, grow, or require future startup rounds.

Unfortunately for many, failure is the most common outcome. 2019 research shows that 9 out of 10 start-ups fail within the first 18 months. Take a look at just some of the most common reasons:

Sometimes – and the most desired outcome – is that the business will gain traction, and future growth can be funded via customer revenue, and debt financing.

The last possible outcome is that your business shows potential, but you require more financing to establish it in your chosen industry. With the right information and expert advice from experienced professionals such as Bruce Lule, you can decrease the chance of your business going bust and successfully attract financiers.

This is where Series A, B, and C funding rounds become your lifeline.

More on this below!

Series A Business Funding

Series A startups are companies that have the basic requirements such as a founding team and proof of concept (MVA).

As you establish your presence, initial capital requirements are usually high as you aim to bring your idea to life. It is a critical sink or swim stage that can weed out weak ideas and management teams.

Investors are offered preferred stock in the private company after a valuation. This will be impacted by:

• Company’s management
• Size
• Track record
• Risk level
• Potential for growth

Potential investors also perform due diligence, so it is important for you to practice good financial planning, and have your own due diligence checklist.

The ultimate aim of raising Series A business funding is to grow your business, so make sure you raise enough working capital for 6 – 18 months of growth.

You might have a challenge on finding these investors, and more so, getting just a moment of their time. Your best option is to join a network of like-minded business individuals in a space where they are open to your proposals. Attend as many networking events as possible and soon, you will have access to all the investors you need.

But don’t take our word for it!

Fuzu, one of our esteemed members secured $3.86 million during their Series A funding round. Its goal is to expand its platform, team, and geographic coverage. If they can do it, so can you!

Series B Business Funding

This is usually the third wave of business funding required, and at this stage, your business has gained a good reputation.

After succeeding in the first two rounds, Series B is usually based on higher, more accurate valuations as the company.

You probably have more physical assets, and comprehensive financial records, so the value of the business increases.

Funding from Series B is usually used to promote growth, with activities such as:

• Moving to a higher bracket
• Increase customer outreach & marketing activities
• Increase productivity
• Increase availability and market reach

But it’s not all sunshine and roses…Series B funding can be the hardest of all the rounds because investors are waiting to see if you will continue growing or fold.

They will be paying more for fewer equities, than those in prior rounds. You are also not yet able to provide concrete proof that your business will definitely succeed in the future.

Risk-averse investors would rather wait for future rounds to wait and see if everything works as planned. This is why you should consider this stage as Series Business Plan.

You will need to meet the correct type of investors at least six months in advance to nurture a healthy relationship. Getting some inside information about their requirements, touchpoints couldn’t hurt, and who better to ask than start-ups who have aced this round?

Nairobi Garage members, Powerhive, Yoco, Twiga Foods, and Swvl collectively raised a whopping $89 million for their companies – all within the comfort of their flexible office spaces at Nairobi Garage. As a member, you will not only have some clearly defined steps to follow but also access to expert advice within easy reach.

Need we say more? Well, let’s just look at how Series C business funding works, and maybe inspire you to aim not just for the sky.

Series C Business Funding

If you have reached the Series C stage, you deserve a hearty pat on the back. You have made it! Your business is most likely doing very well, and you are looking for new markets, product differentiation, or even acquiring other businesses.

But why stop there? A common trend among Series C companies is taking their product to the international market.

They are also looking to increase their valuation before considering an Initial Public Offering (IPO) or an acquisition.

Generally considered the last stage of venture capital business financing, it works much the same way as previous rounds. You can choose to sell preferred shares, and offer holders the right to exchange them for common company stock.

At this stage, you are fully established, control a sizable chunk of the market and have a solid customer base.

You just might need funds to reinforce your existing success – much like our member company, Branch International which raised $170 million in Series C funding – the largest Fintech deal in Africa as of 2019.

Their next logical step would be an IPO – selling stocks to the public – much like Mdundo.com who has millions of users across 9 African countries.

Their IPO, although only offered in Denmark, was oversubscribed by a staggering 111%!

And we at Nairobi Garage are keenly watching this member company as they grow in leaps and bounds – and give you firsthand updates as they happen so watch this space.

Feeling Overwhelmed? A step at a time is the only way to do it.

For a business that is only in the initial stages, these fantastic figures may seem like a lofty, maybe unattainable dream. But with the right support systems, and investors that believe in you, the sky is not the limit.

We encourage you to take the 1st step and join us at Bruce Lule’s #AfterOfficeHours event, which will be held at our Spring Valley location. He is the Founding Investment Principal at Chandaria Capital and you can get a chance to meet him in-person, and further your understanding of business funding. RSVP today.

Featured Photo by Rebrand Cities from Pexels