Startup Funding Rounds Explained: From Bootstrapping to Exit

Raise your hand if you’ve heard any of the following terms but weren’t always sure what they meant: bootstrapping, Series A, exit strategy…

If you’re new to the tech startup world, these words might sound like they came straight out of a foreign language. And in many ways, that’s what a lot of startup lingo can feel like.

But fear not, founder friends: we’re here to demystify common startup funding terms—complete with examples from different companies. Keep all this handy as you build your business, and you might just take away some new insights and alternatives to getting yourself funded.

Getting started: Before Institutional Investors

Bootstrapping

Bootstrapping in business refers to starting and growing a company using your own resources and revenue generated by the business, without relying on external funding.

This allows you to retain full control and equity and prioritize your vision. Equity is one of the most precious assets of your business, so you want to grow your startup as much as possible, before getting external funding and giving up equity and control.

Most successful startups, like the mighty Airbnb, began by bootstrapping their early growth fueled by personal funds and early revenue.

Here’s just how creative they got to just make their vision work: the company financed their start by selling self-designed cereal boxes featuring then-presidential candidates Barack Obama and John McCain as a breakfast option in Airbnbs.

The cereals proved to be very popular and according to their Founder Chesky they sold more than 1,000 boxes and made $30,000 for the company.

Remember, resourcefulness and financial prudence are your essential companions on this path and will also be valued by investors later on.

Family, Friends, and Fools (FFF)

Don't underestimate the power of your inner circle. Friends, family, and "fools" who believe in your dream can be valuable early investors.

This informal group is often considered the first source of capital for many startups, where founders seek financial support from their personal networks.

Dollar Shave Club, for example, secured initial funding from friends and family before attracting any angel investors. However, tread carefully; while this can provide an initial boost to get your business off the ground, it's crucial to approach these relationships with transparency and professionalism.

Clearly communicate the risks involved, set realistic expectations, and ensure all agreements are documented to maintain trust and crucial relationships regardless of the venture's outcome.

Angel Investors

Experienced individuals like angel investors can be your secret weapon, injecting not just capital but also guidance and valuable expertise, mentorship, and networking opportunities to help early-stage companies grow.

Engaging with angel investors requires a well-prepared pitch, a clear business plan, and an understanding of how their investment and network will contribute to the startup's development.

Warby Parker, the revolutionary eyewear brand, received angel funding from friends and colleagues in the fashion industry, propelling their early growth.

Remember, seek "smart money" angels who offer not just funds but also industry expertise and network relevant to your venture.

Formal Funding Rounds: From Seed to Sequoia

Why are the funding rounds named the way they are?

Just as a seed must be planted and carefully nurtured to grow into a strong tree, a startup begins with a foundational "pre-seed" investment to germinate the initial idea, which is then followed by "seed" funding to support its early growth.

Subsequent "Series" rounds, akin to the stages of a “tree's” aka startups development, provide the necessary resources for the startup to branch out, strengthen, and expand, ultimately maturing into a robust and established company.

Pre-Seed Funding

This initial stage focuses on validating your idea through product development, market research, and building a basic prototype.

In the pre-seed stage, the key to nurturing your startup is to actively listen to your customers, absorbing their feedback to shape a product or service that truly resonates with their needs and desires.

This foundational period is about planting the right seeds by building something that people not only need but love, setting the stage for sustainable growth and future investment.

Imagine Dropbox, where the pre-seed funding helped them develop their first functional prototype and secure crucial user feedback to start shaping it into the product millions of people use and love today.

Angel investors, incubators, and early-stage VCs like Founders Launchpad support this critical phase, playing the role of nurturing gardeners.

Seed Funding

With a validated concept, you can now transition into the actual market entry and secure seed funding to refine your product, test market fit, expand your team, and lay the groundwork for growth and a viable business model.

Think of Slack, which used seed funding to build its core chat platform and acquire its first paying customers.

Venture capitalists, angel investors, and accelerators play a prominent role here, acting as venture builders who help refine your product and market strategy.

Series A

Series A funding represents a significant milestone in a startup's journey, typically secured once the initial business model has been proven and there is a clear path to generating sustainable revenue and profitability.

This funding round helps you to expand operations, enhance product offerings, build a stronger customer base, and expand into new markets.

A focus during Series A is on refining the business strategy and achieving rapid growth, leveraging the insights and customer base established during the seed stage.

Companies like Uber used Series A funding to expand their ride-hailing service to multiple cities and solidify their market dominance.

This typically involves significant investments from established venture capital firms like Sequoia Capital, who act as growth catalysts, helping you scale your operations and user base.

Series B and Beyond

Established companies with proven traction seek Series B and subsequent rounds for expansion, product diversification, or new market entry.

Think of Airbnb, which used Series B funding to expand internationally and diversify its offerings beyond apartment rentals.

Series C and later rounds often focus on rapid scaling and preparing for an exit event like an IPO or a major acquisition.

One example is Palantir, the data analytics company, which used later-stage funding to expand its government and commercial contracts and prepare for a potential IPO.

In these stages, venture capitalists often take on a more supportive role, helping you navigate complex business decisions and prepare for your chosen exit strategy.

Path to Liquidity

Exit Opportunities

Exit opportunities in the startup ecosystem refer to the ways in which founders and investors can potentially realize the financial value of their stakes in a company.

These exits not only provide a return on investment but also validate the company's value and success, often marking the culmination of a startup's journey from an idea to a mature, market-leading entity.

Throughout your entrepreneurial journey, you might encounter lucrative exit opportunities such as acquisitions, mergers, or buyouts.

These pivotal moments require careful evaluation with all stakeholders involved, including co-founders, investors, and key team members, to ensure the decision aligns with both the financial and strategic goals of the company.

You probably know about WhatsApp, the messaging app acquired by Facebook for a staggering $19 billion. What you probably did not know, is that the team at the time of exit was only 55 people strong! Pretty crazy, right?

These exits offer founders, early employees and investors a chance to reap the rewards of their hard work and investment.

However, not every exit leads to significant returns. It’s possible that an exit resulted in losses for founders and investors, especially for a startup that wasn’t doing well leading to its exit.

Initial Public Offering (IPO)

The ultimate exit strategy for many still remains an IPO. This is a transformative stage for a startup, marking its transition from a private entity to a public company listed on a stock exchange.

This process not only provides the company with access to capital from public investors but also increases its visibility and credibility in the market.

An IPO requires meticulous preparation, regulatory compliance, and a solid business foundation, making it a significant milestone that reflects the maturity and success of a company's growth journey.

Take Grab’s 2021 IPO as an example, where it was the biggest US debut from a Southeast Asian startup.

Startup Funding Rounds Demystified

Did you learn some new things about startup funding? With the knowledge from this guide, we hope you'll be well on your way to being well-equipped at navigating each stage.

Don’t forget to start small, stay focused, and never lose sight of your vision. Funding might be the fuel, but it’s the follow-through that really propels your startup to the next stage of success.