Historically, most startups lack seamless access to early-stage financing from investors. Sadly, African startups are not exempted from this difficulty, as they face this obstacle even more intensely. New businesses need money either as “startup funding” or “startup capital” because having access to capital is crucial for several reasons, including launching and growing the business from the idea stage to optimal capability.
According to statistics, at least 83% of entrepreneurs do not have access to capital. Lately, there has been a big boom in African e-commerce, fintech startups, and related venture capital investment, with Kenya, South Africa, and Nigeria already being considered hubs conducive for startups in Africa and attracting more funding.
Before any round of funding begins, analysts conduct a valuation of the company. The valuation reflects vital factors, including management, proven track record, market size, maturity level, growth prospects, and company risk.
More importantly, valuation is vital in any funding stage as it influences the type of investors likely to get involved. Also, it reflects why the company is seeking new capital.
In raising funds, startup founders need to be familiar with the various stages of raising capital, as startups require capital through their life cycle. As a business grows and becomes more mature, it advances towards funding rounds, typically beginning with a seed round and continuing with A, B, and C funding rounds.
The funding participants are mainly the individuals who hope to gain funding for their companies and the potential investors/investors who invest in the business because they trust the business to succeed and hope to gain something in return for their investments. Because of this, nearly all investments are structured to allow the investor to retain partial ownership of the company.
The various funding stages include;
1. Pre-Seed Funding
This stage of funding comes very early in the life of the startup. It is the stage where the company is just kicking off operations. Conventionally, the pre-seed funders are the founders themselves, their close friends, or relatives. The nature of the company and the initial cost of setting it up influence how soon this stage of funding materializes. Typically, pre-seed funding is bootstrapping as investors at this stage are very unlikely to invest in exchange for equity. For instance, Kenya’s e-health startup Zuri recently raised a $1.3 million pre-seed round of funding to grow its product offerings and launch operations in new markets.
2. Seed Funding
Seed funding is the first official equity funding stage. It is the first money that a business raises. Seed funding helps grow the business when combined with enough revenue, a successful business strategy, and the perseverance and dedication of investors.
This fund finances the business’s first steps. The money raised is majorly for product development, market research, and team growth. With seed funding, the startup can get assistance in determining what its final products will be and who its target demographic is.
Potential investors in a seed round of funding may include; founders, friends and family, incubators, venture capital firms (VC), angel investors, etc. Seed funding typically ranges from $10,000 up to $2 million, and in some cases, the companies may never emerge to engage in a Series A round of funding.
Notably, most companies raising seed funding are valued between $3 million and $6 million. An example of a company that recently went through this round was Kenya’s Bamba, which secured $3.2 million.
3. Series A Funding
Once the startup has an established user base and consistent revenue or a proper track record, it can seek Series A funding to further optimize its user base and product offerings. The funding may help scale the product across different markets. Here, it is essential to have a plan for developing a business model that would generate long-term profit.
The investors involved in the Series A round typically come from Venture Capital firms. At this stage, investors are more political with their processes, and the startup may find it easier to attract more investors once they have secured a lead investor.
Angel investors also invest at this stage but tend to have much less influence in this funding round than in the seed funding stage. It is worth of note that equity crowdfunding is becoming more common when generating capital in Series A. Recently PayEngine Raised $10 Million in Series A to grow its team, expand access to clientele, develop more financial product offerings within its platform and shore up its international support.
4. Series B Funding
A Series B round is similar to Series A in terms of the processes and the key players. However, this stage takes businesses to the next level, past the development stage. Here, investors help startups expand their market reach because the company has already gone through Series A funding and has developed a substantial user base; what is next is growing the company to meet new levels of demand.
The valuations of companies going through a Series B round tend to range between $30 million and $60 million, with an average of $58 million and an average estimate of capital raised in this stage being $33 million. Certora, an Israel-based company that provides security analysis tools for smart contracts, recently announced it had raised $36 million in a Series B round led by Jump Crypto.
5. Series C Funding
Series C funding is usually the last stage of VC financing. Businesses in this funding stage are doing well and require additional funding to help develop new products, expand into new markets, or even acquire other companies.
However, some companies may conduct more funding rounds, Series D or E. Investors in this round put in the capital with an expectation to receive more than double that amount back. Similar to previous stages of financing, the Series C round primarily relies on raising capital through the sale of preferred shares. The shares are likely to be convertible shares that offer holders the right to exchange them for common stock in the company later in the future.
The players in this round of funding are the investors from previous financing rounds (VC firms and angel investors) who can invest additional capital in the company and attract new investors. New players like hedge funds, private equity firms, secondary market groups, and investment banks are willing to invest, unlike the previous round, which mainly had VCs and angel investors.
Investment in this stage has a lower risk since the business is usually established and has attained an assuring level of success. Many companies use this stage to boost their valuation in anticipation of an Initial Public Offering. Companies in this stage typically have valuations of about $118 million.
Usually, a company would go on to a Series D funding because they are searching for a final push before an IPO or have not reached their goals set out in the Series C funding stage. Caribou (formerly MotoRefi), a Washington, DC- and Denver, CO-based auto fintech enabling people to take control of their car payments, closed $115 million in a Series C funding round, which brings the valuation to $1.1 billion.
6. Initial Public Offering
Initial Public Offering (IPO) is the last funding stage. Here, the company transitions from a private one to a public company. At this stage, the company is stable and willing to offer its shares to the public.
Traditionally, an IPO is a process where a private company offers some portion of its shares to the public and, in turn, raises money from investors. IPO, to some extent, is a payday to founders and investors who stand to profit.
The companies that are best prepared to go this route are those with a solid track record and already in an industry that is the focus of much hype. Borouge, a joint venture between Abu Dhabi National Oil Company (Adnoc) and Austrian chemical producer Borealis, said it secured seven cornerstone investors for its $2 billion initial public offerings (IPO).