Your ideal financing strategy is closely connected to your milestones.
This is an example of milestones for a startup, this does not represent how funding rounds take place in all situations. Funding depends on a variety of factors.
It‘s also possible to have multiple smaller seed rounds, as it‘s happening now in the market, and larger rounds once sufficient revenue is generated.
As you give away shares at different rounds, naturally your shares and mostly those of early-stage investors, get diluted.
Depending on your stage, different financing sources will be available, but there are many more factors that determine what kind of funding is available to your company.
These options are also not available under the same conditions in all locations, and actually vary greatly from country to country depending on liquidity, knowledge of startup investments and the economy. On top of milestones and stage, the main factors affecting the level and funding available are: Sector, Location, Market trends, Competition, Strategy, Timing and Investor role.
The size of the funding rounds we‘ve seen before might be typical for a platform. Sector determines the funding amount needed for each expansion or for product development: for example, a hardware startup easily needs millions before entering the market.
Location is fundamental. The early-stage financing market, including grants, determines the number of companies that will be funded, the sectors and the stakes given away, and ultimately determines the success of many companies. The sophistication of investors also helps in the way funding contracts are structured and also the exit possibilities. Investors‘ rights and protection, which are not guaranteed everywhere, as well as transaction costs, tax breaks for investors and of course the business risks connected to the location have a strong effect on investment flows. You, as the owner, can also decide where your company will be based, to take advantage of this.
Market trends also change financing flows. Funding rounds requirements, specialisation of VCs and other financiers on earlier or later stage companies, the life cycle of sectors from inception to maturity, change the size and characteristics of funding rounds.
Do not underestimate competition: if you want to compete with well-funded companies, you need a somehow comparable level of funding, or a fantastic competitive advantage that money cannot acquire.
Your strategy is of course relevant too: how big do you want to grow, how fast and in which direction you want to expand, determines how much money you will need.
Timing refers to how you structure your different financing rounds and your timely preparation. You can choose bigger and more rare funding rounds, or smaller rounds, when you have the possibility to choose. Raising funds when you have no money left, in addition, may force you to accept the first offer on the table at unfavourable financing conditions.
The investor role affects your financing strategy. They might help you grow and influence future financing rounds, or push for a faster growth that would lead you to adjust your strategy.
What factors will then affect the possibility of being financed the most when your company is early-stage (and also increase your valuation)?
An Investment Readiness checklist includes: