How does funding in a startup work? Equity Round, Boostrap, Debt. — Common Startup Question Ed.3
By: Dicky Perdana Putra
Tags: Funding, Investment, Funding Round, Seed Investment

Common Startup Question Ed. 3 — Credit: PencilCase Font by L. L. Pulm

After the previous article we discussed funding sources and how to sell ideas to these funding sources, then maybe you will increasingly ask questions, how does funding a startup work? How does equity round work?

To explain all of that, I will start with the types of funding. There are three types of funding: Self, Equity, and Debt.

At first, I will immediately explain the source of funding that is most often used and desired by startups, which is of course equity. Here I will explain how equity rounds and startup valuations work for a startup. To explain the equity round, then we can see the flow of the Startup Financing Cycle as shown below:

In the picture above can be seen how the stages of funding a startup depends on how much revenue/traction from the startup. the greater the revenue, the greater the size of the startup means. But to increase revenue the startup needs funding where the picture above also illustrates the funding stages.

Angel Stage >> At this stage, investors who provide funding can be said to have a very high risk of failure, because the startup business is still not going according to plan and is not guaranteed for its success.

Pre Seed >> At this stage, investors must have good business instincts and instincts, because the startup business is still new to come up with ideas with improper hypotheses and analysis, investors must be more careful and analyze the business model of this startup so that funding money can have meaning in the future day. Average funding raised in this stage it must be around $ 1 — $ 20,000.

>> At this stage, investors must have good business instincts and instincts, because the startup business is still new to come up with ideas with improper hypotheses and analysis, investors must be more careful and analyze the business model of this startup so that funding money can have meaning in the future day. Average funding raised in this stage it must be around $ 1 — $ 20,000. Seed >> At this stage, a minimum of a product can be used even though the startup business is still in the process of adjusting and looking for a better business model for the future. At least there are products/services that can be shown to investors as a result of Pre-Seed funding. Average funding raised in this stage it must be around $ 5,000 — $ 500,000 (Depends on how much startup is raised from last round, there is a possibility funding could be more than 500,000)

Early Stage >> At this stage, the startup business must be able to market its products to the market and prove that the products/services offered can be accepted and favored by the market by knowing how many active users of the product or service offered. At this stage, startup businesses usually also need funds for development and promotion in the market, so they can develop their products in the future. At this stage it starts with the term funding round using letters, start from Pre-Series A, Series A, Series B, and so on until the startup valuation is large enough to be included in the Later Stage category (usually at startup C or D). At this stage startup usually raised around $500,000 — $10,000,000 ((Depends on how much startup is raised from last round, there is possible that funding could be more than 10,000,000)

Growth Stage >> At this stage, startups that can get funding from investors are startups that have a clear business model and contend or already be a market leader. Divided into 2 stages:

Later Stage >> startup business at this stage can be said to be more stable, this is shown by the company going forward, the number of customers continues to grow as well as the amount of funding that continues from the previous funding series namely series C, D, E, F, G , H and so on, with nominal funding to infinity. For example, currently Go-Jek and Tokopedia which already have unicorn status are still continuing to seek funding through a funding round in a later stage.

>> startup business at this stage can be said to be more stable, this is shown by the company going forward, the number of customers continues to grow as well as the amount of funding that continues from the previous funding series namely series C, D, E, F, G , H and so on, with nominal funding to infinity. For example, currently Go-Jek and Tokopedia which already have unicorn status are still continuing to seek funding through a funding round in a later stage. Go Public >> At this stage the startup business has no problems in its business model and is already running well so it is time for startups to convince investors that the funding provided can double in a certain amount of time. This is the final stage where investors reap the results of the seeds that are sown at the time of funding the selected startup business.

At this stage the startup business has no problems in its business model and is already running well so it is time for startups to convince investors that the funding provided can double in a certain amount of time. This is the final stage where investors reap the results of the seeds that are sown at the time of funding the selected startup business. Exit >> Rather than going public, some startups choose to use an exit strategy where the startup can release the startup through mergers or acquisitions.

Maybe you will ask as to whether a startup can jump to series C without going through series A? That’s not how this thing works. When in very rare cases, you have never raised funding before, and you are looking for funding with a large direct amount which is roughly equivalent to the size of other C series startup funding, then you will still refer to this funding as series A funding. A, B, C is not to describe the amount of funding, but rather describe how many times you have raised funding.

Founders raise the funds as per their needs. Although there are some founders who believe in bootstrapping, most of the startups will typically look for external investors throughout their lifecycle. Starting a company by bootstrapping generally means that an entrepreneur will initially use his personal finances. Further down the line startups fund their development through internal cash flow by reinvesting their profits in the business’ growth. Many people get the start-up money they need by mortgaging or remortgaging their homes, or selling property or possessions — even those who do succeed in getting a start-up business loan. Lending institutions and investors usually expect the person starting a business to make a personal financial commitment.

Debt funding is raised by borrowing money from individuals, banks, or other credit institutions. Debt funding requires surety, which means that you will have to commit something of value (typically two to three times the value of the loan if you deal with banks). Once you get the loan you will also have to pay interest and make sure that your debt is cleared within a given amount of time.

There are interesting combinations of the above. One such funding instrument is called “convertible notes”. It is a short term loan that can be “repaid” by changing it into equity at a predetermined point in time and it is used often when new businesses need short term debt to bridge them until they are ready for a funding round.

It is a fact that the correct leverage of other people’s money is a key ingredient in long term success and wealth. However, it comes at the cost of requirements and agreements that restrict one’s capacity to develop early-stage businesses into what one envisioned.

In my experience and opinion, bootstrapping is the lowest risk approach to establish a young business and create a validated proposition. Once it is established, one can go out and find funding to leverage.