Fernway DiarySM

Apr 05, 2022

When startup ventures take on the challenge of developing an industry-changing business model or innovative product, they do so in the knowledge that the process of taking their idea from concept to reality will require investments of time and capital that may not show immediate results. Outside funding can provide the support needed to finance essential research and development and meet aggressive growth goals in order to help a promising startup meet its potential. Depending on its stage of growth, a startup is funded in a variety of ways. Understanding common options can assist founders in seeking the right funding source at the right time for their startup’s needs.

Bootstrapping: Bootstrapping is when founders fund their startup with their own money or a small personal loan. New ventures just beginning may launch themselves this way as they develop proof of concept or a working prototype, especially if there are only a few people on the team.

Friends and family investments: In conjunction with bootstrapping, small infusions of capital from friends and family often make up the first stage of financing for new startups. The amount depends on the financial circumstances of the founders’ personal network and their appetite for risk, but these investments are typically on the lower end (tens of thousands of dollars).

Angel investors: Angel investors tend to be high-net-worth individuals who invest in startups at the early stages of development with their own money. These types of investors take on the higher risk inherent in helping a startup take its first steps for the potential of greater returns in the event the enterprise succeeds. The amount of investment at this level is often in the hundreds of thousands of dollars.

Seed funds: Institutional seed funds are a group of investors with pooled resources who professionally invest in startups, with general partners running the fund and directing the investment strategy. (Note that there are also pre-seed funds that function similarly, but which are targeted at earlier stages of startup growth.) The involvement of a seed funding group can be a spur for startups that have not yet fully professionalized their operations in terms of accounting, legal, and tax preparation to do so, as accountability to potential investors will only grow more rigorous from this point forward.

Series A: Series A funding is the first significant round of venture capital financing a startup receives. At this stage, startups can expect investment firms to perform extensive due diligence and to have clear expectations for meeting key performance indicators. This round of funding typically raises 18 to 24 months of cash to fund ongoing growth and development. An additional advantage to securing funding from a venture capital firm is the access to resources such as recruiting and operations teams, social networks, and expertise that can help startups continue to professionalize and adopt best practices.

Series B: Series B funding takes place when startups have demonstrated success but need additional capital to move beyond early-stage development. While the risk to investors is lower at this point, the amounts are higher (averaging $33 million) than in earlier funding stages. Founders can expect even greater scrutiny into the company’s financials and track record of meeting performance milestones to secure this and subsequent rounds of later-stage funding.

Series C: By the time a startup has reached the Series C level of funding, they have already made a significant impact in their market and are poised to go further with additional financial support at a level scaled up from a Series B funding round. This may be the final round of equity funding for some companies, while others go on to additional rounds.

Preparing for Success

Venture capital funding provides startups with the backing needed to achieve growth and market penetration. At each stage in the business lifecycle, startups lean on professional advice to ensure their business is structured effectively for growth, scale, and shareholder liquidity. Investors gain comfort in strong financial due diligence prior to investing capital into a new venture. Fernway Solutions offers a full range of advisory, corporate structuring, tax planning, compliance, and accounting services to ensure your startup has what it needs at each stage of its growth.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:

The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.