Raising capital is one of the most critical steps for entrepreneurs looking to grow their businesses. Whether you're launching a startup, scaling operations, or preparing for a significant exit like an acquisition or IPO, understanding your funding options is essential.
Venture capital (VC) plays a pivotal role in fueling innovation and supporting high-growth ventures, but it is just one piece of the broader capital-raising landscape. By choosing the right funding type for your stage of development, you can unlock the capital and expertise needed to achieve your business goals.
In this blog, we explore the world of venture capital and its different stages, while also touching on other vital capital-raising strategies that can complement VC or serve as alternatives. Understanding these options will empower you to make informed decisions about the best path forward for your venture.
Pre-seed funding: Proof of concept
Pre-seed funding typically helps entrepreneurs develop ideas before they become a revenue-generating business. Common sources of pre-seed business funding include:
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Founders’ personal savings - many entrepreneurs start by funding their ventures with their own savings (“bootstrapping”), showing personal commitment and reducing early reliance on outside capital.
- Friends and family - often the most accessible and flexible source, friends and family members who believe in the founder's vision may provide funds with less formal agreements or lower expectations of immediate returns.
- Angel investors - angels are typically affluent individuals who invest in startups in exchange for equity or convertible debt. They often seek higher returns but are more risk-tolerant than later-stage investors. Some also provide mentorship and industry connections.
- Grants and competitions - many government agencies, non-profits, and foundations offer grants to startups, especially in specific sectors like technology, healthcare, or environmental sustainability. Some large corporations and universities also host competitions that reward winners with funding.
- Crowdfunding - platforms like Kickstarter, Indiegogo, and Republic enable founders to raise small amounts from a large number of backers. These funds don’t usually require giving up equity, and they also help validate the market demand for the product or service.
- Venture builders and studio funds - startup studios, like Atomic or Idealab, help founders by co-developing ideas and sometimes provide both funding and hands-on support in exchange for a larger share of equity.
- Corporate innovation programs and partnerships - some large corporates partner with startups to fund innovative projects or acquire technology. While uncommon, they can be a fit for certain founders with specialised tech.
Pre-seed funding sources are generally less formalized and can often be mixed to suit the needs of the startup, allowing founders flexibility at a stage when their business is not yet proven.
Seed funding: Laying the foundation
Seed funding is the earliest stage of venture capital and is crucial for entrepreneurs looking to develop their initial product, conduct market research, and build a solid foundation. This funding usually co
mes from angel investors, friends and family, or specialised early-stage VC firms. Seed funding often covers essential costs like product development, early hiring, and marketing.
While seed funding is essential for building out an idea, it’s worth noting that not all startups seek venture capital at this stage. Some may opt for bootstrapping, using personal funds, or turning to crowdfunding platforms to raise early capital without giving away equity. Crowdfunding, especially through reward-based or equity-based platforms, can also serve as a proof of concept for your business, attracting further investment down the line.
Venture capital: Series A funding
Early-stage funding, commonly referred to as Series A, represents the first institutional round of venture capital. Series A is a distinct stage of a company's development, which is more than an idea and has a product/service ready to develop.
For entrepreneurs, raising a Series A round marks a significant milestone.
Venture capital: Series B and beyond
Once a company has achieved significant traction and is ready to expand rapidly, it often looks to raise Series B, C, or later-stage funding rounds. This growth capital is primarily used to drive larger-scale initiatives such as entering new markets, increasing production, and boosting sales and marketing efforts.
- Series B focuses on scaling with robust market traction.
- Series C drives major expansion and prepares the company for strategic moves like an IPO or to cover exiting first-round investors.
- Series D+ are late-stage rounds, addressing final scaling or unforeseen needs, often right before IPO or acquisition. Commonly used to provide runway for longer-term plays in medtech or major disruptors (ie Spotify, Monzo bank, Skyscanner).
Venture capital firms investing at this stage look for businesses with proven models, substantial revenue, and a clear path to profitability. However, it’s also important to explore alternative sources such as venture debt or convertible notes. Venture debt provides capital without giving away equity, allowing you to retain more ownership in the business while still raising funds to grow.
Scale-up funding: private equity and corporate VC funds
Beyond venture capital, private equity firms and strategic corporate investors often play a significant role in growth-stage funding. Private equity firms focus on companies that have matured beyond the startup phase but still have substantial room for expansion. Strategic corporate investments, as we will discuss later, can also offer growth-stage companies access to industry expertise and strategic partnerships that go beyond pure financial support.
- Private equity (PE) – offers companies substantial capital, strategic expertise, and operational support, making it valuable for growth, restructuring, or acquisitions. With a longer-term focus and extensive industry connections, PE firms can drive value creation and streamline operations, often reducing the need for debt. Common downsides are loss of control, brutal performance targets, and increased oversight and reporting demands. PE firms also emphasize exit strategies within 5–10 years, which may pressure companies toward short-term profitability over sustainable growth.
- Corporate venture capital - strategic corporate venture capital (CVC) refers to investments made by established companies in startups and high-growth ventures. These investments are driven not only by financial returns but also by the strategic objectives of the investing company, such as gaining access to new technology or entering adjacent markets. Some investments progress to joint ventures or acquisitions.
- Impact and social venture capital – if your investment proposition focuses on clean energy, healthcare, education or the green economy, impact and social venture capital provides capital and support from investors who share their vision for making a positive impact on society. For entrepreneurs, accessing impact-focused funds requires demonstrating both the potential for financial success and a clear strategy for achieving social or environmental goals. For values-driven businesses, there are appropriate investors to match.
Mezzanine Financing: The bridge to IPO or acquisition
Mezzanine financing is a hybrid of debt and equity, often serving as a bridge for companies preparing for a major financial event such as an IPO or acquisition. This funding provides the necessary capital to strengthen a company’s position, allowing it to expand operations, acquire other businesses, or refinance existing debt. It is typically less dilutive than traditional equity financing but can carry higher interest rates or repayment terms.
For businesses that are not quite ready for public markets but need substantial capital, mezzanine financing offers a flexible option. Companies considering this form of funding should weigh the costs against the potential benefits, particularly if they expect to exit soon. Revenue-based financing and royalty financing can also be alternatives, providing capital based on your revenue streams without requiring equity dilution or repayment schedules that would stress cash flow.
Conclusion: Choosing the right funding type for your business
Raising capital is a complex and critical aspect of growing any business. Whether it’s seed funding, growth capital, or mezzanine financing, entrepreneurs must carefully consider their options and align their funding strategy with their business goals and long-term vision.
While venture capital remains a powerful tool for scaling high-potential ventures, it’s not the only option. Crowdfunding, private equity, venture debt, and impact investing all offer unique benefits depending on your stage of growth and the nature of your business.
By understanding these different capital-raising strategies and working with experienced advisors, founders can find the right partners to fuel their journey toward success.
