A lot many times, it is possible for you to get confused in the different ways that you can seek funding. To seek funding is a tough task but to understand what suits best for your business, may get tougher if you aren’t sure of all kinds.
Here’s all that you need to know when it comes to funding;
An Angel Investor is an individual or a group of investors who usually put money in your business in exchange for an ownership stake in your company. Usually interested in investing at the early stage, they are there to get your company off the ground and start operations with sound financial backup.
A form of short-term debt, a convertible note turns into equity wherein instead of demanding the principal amount and interest, the investor receives equity in the firm. The investors lend money in the first round of financing for a start-up and they receive shares as part of the startup’s initial preferred stock financing, based on the terms of the note.
A corporate round takes place when instead of venture capitalists, a company makes an investment in another company. It is usually done for the purpose of forming a strategic partnership.
If a company is generating losses and needs money to finance their debt, investors usually lend money in exchange for the principal payment with a pre-determined interest rate. The company raises money to finance its working capital or the capital expenditure they incur with the money raised.
Under this type of crowdfunding, individual investors put in small amounts of money but form a large group of investors. The amount invested is in exchange of equity stake which promises them a return on the amount invested by them. It is usually done to fund start-up companies or small businesses since they show great potential and seek smaller investments.
Funding round is a general term for the rounds when the money is raised by investors once the information on the type of funding is given out. It entails the intervals between which the funding is raised.
In the simplest of terms, a grant is when an individual, company or government agency provides for the capital in a company without taking an equity stake in the company.
Similar to crowdfunding, the only difference here is that it is dealt in cryptocurrency. When a campaign is held by a company seeking an ICO, backers purchase a percentage of a new cryptocurrency (Coins or Tokens) by purchasing it in an existing form of cryptocurrency such as a bitcoin, hoping that the new cryptocurrency grows in value.
In this type of funding, the company or investor provides office space or mentorship to a company without getting any equity stake in the company.
When a company provides its product in exchange of capital for the company (the product often times still being in the developmental stage) is when product crowdfunding takes place. This round is also typically conducted across crowdfunding platforms.
This type of funding occurs when the firm is already established and is done via a hedge fund or a private equity firm. The investment done is less risky but the quantum of money is much larger, starting upwards of $50M.
This type of funding occurs when firms invest in a company which has already gone public and has had its IPO in the past.
Just like debt financing where the investor firm agrees on receiving the principal payment plus the interest, Post IPO-Debt funding is a similar concept. The only difference cited is that the funding takes place after the company has already gone public.
Similarly, once the company has gone public, Post IPO-Secondary is when an investor purchases the shares of stock in a company from other existing shareholders and not from the company directly.
A Pre-seed round of funding is one which bridges the gap between the beginning of the start-up and the consecutive seed-funding rounds which are much larger in size. It has a very low amount figure and does not have any institutionalised investors. Most commonly, the money comes from the founders themselves, their friends or family in this round.
The first initial round of funding that the company will receive, it is usually done at a smaller scale. Compared to the analogy of a tree, the seed forms the financial support for the business to grow into. Seed funding forms the precursor to a company’s Venture Series round but after the Angel Investor round of investments has already taken place.
Venture capital funding is the financing done for companies wherein large ownership stake is sold to a few investors through independent limited partnerships. These partnerships are established by venture capital firms who invest at different stages of evolution in a company and show exceptional growth potential. The investment done is at a large scale and it comes from well-off investors, investment banks and other financial institutions. Usually done through a Series A, B & C rounds, Venture Capital doesn’t only take monetary form but also can be provided in the form of technical and managerial expertise.
And so you have it! Funding comes from a lot many sources and they are largely reliant on the early stages of a business where the growth potential is the greatest. What’s key to understanding it is who invests in your business than how much he does.
In the words of Jodie Fox, Founder, Shoes of Prey