In this piece I set out a “rough guide” to the funding journey which can be applied to a good number of our technology clients. However, it should be noted that each businesses' funding journey will differ, so this blog should be taken as a guide rather than a blueprint.
The first milestone for many clients in the technology sector is the establishment of a minimum viable product.
The key elements of MVP are the subject of some debate but MVP is essentially a product with sufficient features to garner early customers whilst enabling collection of development feedback. MVP is beyond prototype-stage but should be cheap to build. Whilst establishing MVP the necessary capital most often will come from the founders themselves. Family and friends may also support but if they do it is unlikely that they will take equity at this pre-seed stage.
As the business looks to transition to MMP (minimum marketable product) and through to MMR (minimum marketable release), the business will seek start to seek funding, initially seed funding. The specific point at which this become appropriate and/or possible varies. But it is important at this early stage to have regard to and conduct analysis of what the overall capital table needs to look like for the founders, management team and senior employees through the expected funding journey to ensure their interests are safeguarded and they can be properly incentivised throughout. Seed funding is the first official equity funding stage and provides the capital to enable finance of market research, essential product development and ideally some professional support to ensure the enterprise is properly structured.
Participants at the seed-funding point, such as angel investors, will commonly expect an equity stake in exchange for the funding provided. Angel investors typically appreciate the high-growth opportunities offered by startups with limited track record but a strong value proposition and the right management team to deliver it. Seed funding rounds vary significantly in terms of the amount of capital they generate for a new company.
One other key consideration at this point relates to choice of investor. Specifically, businesses can seek-out the “smart-money” as part of the analysis on which of the prospective investors are best-suited for the company. Taking investment from industry-experts, experienced entrepreneurs, well-qualified professional services advisors or other people complementary to the business proposition or the skillset of the management team is an excellent way to enrich the overall business in addition to securing the financial investment.
Once the business has established its user base and such key performance indicators as revenue or adoption rates it may then seek more funding via a Series A funding round. This may be to take the product to additional markets, whether geographic, to expand the user base or otherwise. Management should ensure it has a plan for monetising the business to generating long-term profit. Participants at Series A stage are commonly venture capital firms. Angel investors may also be involved though they tend to have much less influence in this funding round than they did in the seed funding stage. It is worth noting that companies are also turning to equity crowdfunding as part of a Series A funding round, because at Series A stage it can be challenging to source investment from a smaller number of venture sources.
Following a Series A funding round, companies may look to build on their substantial user bases and scale-up to create and meet greater demand. They will have already have proven to investors that they are prepared for success on a larger scale and will raise Series B funding to grow the company so that it can meet these levels of demand. Series B capital is often deployed towards hiring further key talent as well as in pursuit of essential business development, sales, advertising, tech, support.
It is fair to say that Series B funding rounds are similar to Series A funding rounds in terms of the fund-raising process and the investor-profile - i.e. a principal "anchor" investor around which other investors can gravitate. But crucially at Series B stage, the prospective investor-pool includes venture capital firms that specialize in later-stage investing.
Most commonly, a company will end its external equity funding with Series C. However, some companies can go on to Series D and even Series E rounds of funding as well. However Series C funding represents a particular milestone insofar as being in a position to seek Series C stage funding already represents very significant success. Series C additional funding is generally used to enable the company to develop new products, expand into new markets, or even to acquire other companies. Series C funding is focused on scaling the company, growing as quickly and as successfully as possible. At Series C stage it is also not uncommon for one or more existing shareholders to cash out on the back of the enhanced liquidity created by the incoming investors.
The Series C investor-pool typically comprises hedge funds, investment banks, private equity firms, and large secondary market groups alongside the types of investor mentioned above and it is not uncommon for the next stage for these companies to be IPO. Companies engaging in Series C funding should have established, strong customer bases, revenue streams, and proven histories of growth.
Our Technology Funding team supports clients at all stages of the funding journey. We have been alongside many of our clients from inception of their business idea to exit and in many cases, more than once as they transition from one successful business-build to the next.
"It is important to have regard to and conduct analysis of what the overall capital table needs to look like for the founders, management team and senior employees through the expected funding journey to ensure their interests are safeguarded and they can be properly incentivised throughout."