All you need to know about how startup funding works

New Delhi: It is not uncommon for startups to engage in what is known as "seed" funding or angel investor funding at the outset, as per Investopedia.

Next, these funding rounds can be followed by Series A, B and C, as well as additional efforts to earn capital as well, if appropriate.

Series A, B and C are necessary ingredients for a business that decides bootstrapping, or merely surviving off of the generosity of friends, family and the depth of their own pockets, will not suffice, as per Investopedia.

The path for each startup is somewhat different, as is the timeline for funding. Many businesses spend months or even years in search of funding, while others (particularly those with ideas seen as truly revolutionary or those attached to individuals with a proven track record of success) may bypass some of the rounds of funding and move through the process of building capital more quickly.

Series A, B and C funding rounds are merely stepping stones in the process of turning an ingenious idea into a revolutionary global company, ripe for an IPO, Investopedia said.

How Funding Works
Before exploring how a round of funding works, it's necessary to identify the different participants. First, there are the individuals hoping to gain funding for their company. As the business becomes increasingly mature, it tends to advance through the funding rounds; it's common for a company to begin with a seed round and continue with A, B and then C funding rounds, as per Investopedia.

On the other side are potential investors. While investors wish for businesses to succeed because they support entrepreneurship and believe in the aims and causes of those businesses, they also hope to gain something back from their investment. For this reason, nearly all investments made during one or another stage of developmental funding is arranged such that the investor or investing company retains partial ownership of the company. If the company grows and earns a profit, the investor will be rewarded commensurate with the investment made.

Before any round of funding begins, analysts undertake a valuation of the company in question. Valuations are derived from many different factors, including management, proven track record, market size and risk. One of the key distinctions between funding rounds has to do with the valuation of the business, as well as its maturity level and growth prospects.

Pre-Seed Funding
The earliest stage of funding a new company comes so early in the process that it is not generally included among the rounds of funding at all. Known as "pre-seed" funding, this stage typically refers to the period in which a company's founders are first getting their operations off the ground. The most common "pre-seed" funders are the founders themselves, as well as close friends, supporters and family, according to Investopedia.

Seed Funding
Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises. Some companies never extend beyond seed funding into Series A rounds or beyond, Investopedia said.