Pre-seed
At this stage the venture is not yet structured and organized. Minimum Viable Product (MVP) is not yet developed but it has been duly planned. At this stage, most startups are self-funded (i.e. through owners, their family and friends, this is also known as bootstrapping) until the MVP is developed. Although there are some Angel Investors or Venture Capitals that fund start ups at this stage, securing funding with no working MVP can prove very difficult. Funding at this stage often comes with higher than usual investor demand for equity in the venture. Founders at this stage need to proceed with extra caution when dealing with outside investors.
Raising Pre-seed Funding in Canada
If pre-seed funding is your only option, you need to prepare well. Remember that you do not have an MVP or any traction, and you are still in the very early stages of your venture. But to increase your chances of securing funding at this stage, you have to compensate for your shortcomings by properly preparing for your potential investor meetings. You should at the very least prepare by:
Having a sound business plan with accurate financial forecast: this will tell your investors that you have thought your venture through and were able to pinpoint how much exactly you need at this stage and why
Researching potential investors: no investor invests in everything. You need to do your research and ensure that your venture falls within your potential investor’s appetite. You can do this by carefully analysing your potential investor’s portfolio. For example, you will have no luck presenting a high-tech venture to investors who only look for social enterprises.
Creating effective pitches and presentations: This probably is the most important factor. After all, investors are humans and humans love to hear good stories. If you can tell the story of your venture well, chances are will get funding. Do bear in mind that no investor will invest in your venture just because you are a good storyteller but if you are, you will have much higher chances of securing financing for your start up.
Useful sources
In Ontario and the GTA, firms like Extreme Venture Partners (Mobile, Data & Analytics, or Internet of Things), Golden Ventures, and Mantella Venture Partners (Internet and Mobile), have been focused on seeding tech startups in the $25K-$500K range.
Some Angel networks in Ontario for pre-seed include Maple Leaf Angels (FinTech, IoT and ICT, Healthcare), AngelOne Investor Network (SaaS, ICT, Healthcare, CleanTech, and Industrial sectors), and York Angel Investors.
You should also actively look to expand your network by searching for entrepreneur and Startup events, law firms specializing in assisting start-ups, CEOs of successful start-ups, Linkedin, small business events, business advisors
Seed
The Seed round commonly refers to a series of investments in which a group of investors put money into the new company. The seed stage is usually dedicated to building the foundations of the new company and is often based on the company having an MVP, and showing some traction with clients.
The combination of the MVP and some early traction can go a long way in securing seed financing for the venture but founders need to remember that money is not all they should seek. With Angels being mainly ex or current entrepreneurs and venture capitalists having extensive experience dealing with startups, at this stage the founders should also look for non-financial support from their funders. This support can be crucial for later stages where the start up wants to scale or sell. The option to access the wisdom and network of seasoned investors is a very important advantage, that shall not be overlooked. Founders are advised to proceed with caution at this stage to ensure they get the much needed financial and non-financial backing.
Useful sources
- Accelerators, Incubators, Angels and specialized VCs can all be good sources for seed-financing. At the same time, major banks and tech corporations have an assortment of seed VC branches you should consider targeting. Compose a list, research your potential investors to ensure they do engage with seed financing, make sure you venture is a fit for their portfolio, prepare in advance and make contact.
- Read Y Combinator’s Guide to Seed Fundraising. They have been used to launch many companies including Airbnb, Doordash, and Dropbox and the valuation of their top companies was over $155 billion in 2019. So its definitely worth a careful read.
Link: https://blog.ycombinator.com/how-to-raise-a-seed-round/
Series A
In Series A funding, investors are not just looking for great ideas or good story tellers. Rather, they are looking for companies with solid strategies for scaling and profitability. This stage is more about numbers, forecasts and financial analysis than anything else.
The name is inspired by the class of preferred shares that are sold to investors in exchange for their investment. It is no surprise that investors at this stage want proper consideration for their investment and that means shares that will give them priority both in equity and in debt. It is difficult to give an average amount of funding at this stage but the range in Canada is anywhere between $2-15 million.
It is obvious that such amounts of investment come with demanding terms, conditions and expectations. It is therefore best for founders to properly assess their options before deciding to seek Series A financing: is the venture scalable enough? Is cash the only constraint of the venture, or there are other issues like a product-market fit problem?
Investors at this stage tend to demand the founder to know precisely what they are doing and what they are planning. They will expect you to show how you will increase your revenue 2-5 times in the coming months.
Useful sources
- Read Justin Kan’s The Founder’s Guide to Raising a Series A Venture Financing. Justin is the founder of Twitch and Atrium and served as a Partner at Y Combinator.
Series B
Bigger investment for bigger companies. The investment amount at this stage are usually $10+ million. This stage often requires the venture to be generating considerable revenues and traction. The venture by this stage shall have an evaluation that attests to its success. The goal at this stage is to raise capital to tap into other markets, surpass competitors and develop complimentary or integral products or services. The founders are no longer on their own at this stage as the Series A investors are typically the ones re-investing or actively promoting the venture in their networks of influence. This is another reason why selecting your investors carefully at early stages will pay off later.
International expansion and user base diversification are usually among the main objectives at this stage. Therefore it is worthwhile if you plan in advance for this type of expansion at your early stages. Crafting an identity that could appeal to a very large user base is a must that can be thought about from the venture’s early days.
Companies that often qualify for this stage have valuations between $15 million to $60 million and the investment amounts range between $10 million to $30 million.
Series C
Ventures at this stage are mature, successful and well-established companies that are now playing in the big league. Just like all investment in prior stages, a big objective in Series C is further scaling and expansion. The investment at this stage is often used for acquisitions of other companies (often early competitors) and to ultimately boost valuation in anticipation of an Initial Public Offering (IPO). Companies at this stage often value in the $100+ million range and have the position of power. After all the company is highly successful, risky times have passed and impressive performance is now a reality. Investors are now the ones approaching the company for a chance to play. In Series C and beyond (i.e. Series D, E and ,…) groups like hedge funds, and investment banks are the regulars.
