Shabih Rizvi is a partner at KPCB and focuses on consumer investments.
Muzzammil ZaveriContributor
Muzzammil Zaveri is a partner at KPCB and focuses on consumer and enterprise investments in the firm’s digital practice.
Over the last decade, the early-stage funding environment has dramatically changed. There are now myriad financing options that founders can consider as they look to build their companies. Nearly 70,000 companies received funding through angel networks and 3,000 through venture capital firms annually, according to CB Insights.
On the most recent episode of Ventured, we spoke with Qasar Younis, Chief Operating Officer of Y Combinator (YC), about the early-stage funding landscape and how entrepreneurs can best navigate the waters of raising capital today. Here are some takeaways from our discussion.
Benefit from more accessible investors
The startup ecosystem is more sophisticated than ever before because of global availability to startup resources and new types of funding sources. With platforms like AngelList and Indiegogo, access to early capital has dramatically improved. Investors like Y Combinator (YC) and KPCB have continued to increase funding accessibility for founders regardless of location. Programs such as KPCB Fellows or KPCB Edge target entrepreneurs earlier in their careers while the YC Fellows Program and the YC College Tour seek to educate new entrepreneurs on how they can begin their journeys as founders.
Consider all funding options before tapping VCs
There are roughly four ways to get funding for your startup. Understanding your funding options and thinking critically about each path is crucial to your success — and is often overlooked.
Bootstrapping: This is how the majority of companies are funded today. The benefits here are that you retain maximum ownership of your company. However, this may not be sustainable as your capital requirements grow.
Incubators & Accelerators: If you are a first-time entrepreneur, it can oftentimes be helpful to join an incubator or accelerator to get your business going. While there’s a variety of these that exist today, most usually provide mentoring, content and a small amount of capital.
Online Platforms: There are a number of funding platforms available online. As a founder you can utilize these to get a sense of demand for your product, find angel investors from across the globe and get feedback on your company.
Venture Capital: While some founders may jump straight to venture capitalists, most usually reach this step later in the life of their companies. By utilizing the options, or a combination of options outlined above, you can prove more out as a founder prior to meeting investors.
Don’t worry too much about today’s macro environment
While the current economic environment has beenfluctuating over concerns of global growth and European solidarity, early-stage founders should not panic. The macro-funding environment does not necessarily constitute a barrier to achieving success. Oftentimes, downturns provide unique opportunities for entrepreneurs to succeed because it’s harder for competitors to raise capital, and talent is usually cheaper to hire. For instance, more than half of the companies on the Fortune 500 list in 2009 were started during recessions or bear markets, as well as almost half of the firms on the Inc. list of America’s fastest-growing companies in 2008. In the most recent economic turmoil of 2009, both WhatsApp and Square were started.
Great companies are founded irrespective of a boom or bust. Startups are a test of will and determination and as a result are often on a seven- to 10-year time horizon, if not longer.
Stay focused on customers and users
While many entrepreneurs don’t realize it, they may be going through the motions and simply doing things that look and feel like work but aren’t actually creating value that will ensure long-term success. Two areas that highlight this gap are customers and product fit, or making stuff that people really want. Not enough entrepreneurs truly understand their customers, especially in the early days, even though that understanding will help dictate product and roadmap decisions. Similarly, founders need to be able to explain why customers actually want the product they are creating, since that insight will help drive almost any business forward.
Know that VCs invest in people, not pitch decks
Although we evaluate certain metrics that help us gain conviction about a particular company, we often invest in the intangibles — the things that are hard to get across on paper. We find ourselves asking questions like how do the founders work with each other, how do they communicate, what do they know that no one else knows and how are they uniquely positioned to solve this unique problem? Having conviction about the team beyond quantifiable growth or user metrics is a major driver for how we decide to invest in companies.
FAQs
The definition of early stage capital says that early stage capital is collected with the purpose of supporting the development of the startup company's products or services. These funds can also be used for initial marketing and manufacturing of your products and/or services.
What does series ABC funding mean? ›
Series A, B, and C are funding rounds that generally follow "seed funding" and "angel investing," providing outside investors the opportunity to invest cash in a growing company in exchange for equity or partial ownership. Series A, B, and C funding rounds are each separate fund-raising occurrences.
How much is seed funding usually? ›
How much money is involved in seed funding? Seed funding is usually between $500,000 and $2 million, but it may be more or less, depending on the company. The typical valuation for a company raising a seed round is between $3 million and $6 million.
What is the difference between seed round and Series A? ›
While both types of funding are critical for a startup's success, they differ significantly in terms of the amount of funding, investor expectations, and the stage of the company's growth. Seed funding is the earliest stage of funding for a startup, while Series A is the first institutional round of funding.
What are the problems with early stage ventures? ›
Lack of funding: Many early stage ventures are underfunded, which can lead to cash flow problems and a lack of resources. 3. Lack of customers: Without customers, a business cannot survive. Early stage ventures often have difficulty attracting customers, due to a lack of awareness of their product or service.
What are the stages of fundraising? ›
The fundraising cycle outlines six stages to identify, engage, evaluate, solicit, recognize, and steward your donors and donor prospects. This goes hand-in-hand with the donor cultivation cycle, which focuses on building relationships with your donors.
What does series F funding mean? ›
Series F Funding
This is many years into a company's lifecycle. Series F funding is largely used for capital-intensive businesses that need to fuel their next stage of growth, an IPO, an acquisition, or expansion.
Do founders make money in Series A? ›
Typical founder compensation by stage
As startups mature, founders tend to take home more in cash compensation; this makes sense, given that the later-stage a company becomes, the more capital it likely has to pay the team. Here is average founder pay by stage for 2024: Seed: $133,000. Series A: $183,000.
What is a good Series C funding? ›
Private equity firms, hedge funds and investment banks often contribute to this round of funding due to the low risk, proven business plan and the chance to back a company that could grow to be worth billions. The average Series C investment in 2020 was about $59 million.
What is the C round of funding? ›
Series C financing (also known as series C round or series C funding) is one of the stages in the capital-raising process by a startup. The series C round is the fourth stage of startup financing, and typically the last stage of venture capital financing.
There are a few risks associated with seed funding. First, the startup company may not be able to raise additional funds from venture capitalists or other investors if it fails to meet its milestones. Second, the company may not be able to repay the debt if it is not successful.
Do you pay back seed funding? ›
After seed capitalists have been introduced to entrepreneurs, seed money providers will agree on the amount of seed money they'll invest. This seed money is then repaid within a specific time frame with interest attached.
Is early stage the same as seed? ›
The term "early stage investing" can be a little confusing, as there are different types of early stage investing. The most common type of early stage investing is what is called a seed investment. A seed investment is usually a smaller amount of money that is put into a new business or venture.
What is a small amount of seed money? ›
Seed capital is the first stage of funding a business. It's used for a business in its very early stages and typically isn't a lot of money (under $1M). Startups typically use seed money for launch-related expenses like: Rent or real estate.
What is the difference between early stage and late stage funding? ›
In comparison, early or seed funding is provided to startups in their early stages when they are focussed on validating their business idea and building the foundation for growth. While late stage funding is geared towards fueling expansion, early stage funding is focussed on product development and market validation.
Is series B considered early stage? ›
Series B financing is the second round of funding for a company that has met certain milestones and is past the initial startup stage. Series B investors usually pay a higher share price for investing in the company than Series A investors.
What is the difference between growth stage and early stage? ›
Early stage businesses generally have a tested prototype or service model and have developed a business plan. The company may be generating early stage revenue but might not be profitable yet. Businesses in the growth stage are in commercial operation with solid traction and existing customers.
What is the difference between early stage and Series A? ›
In general, seed funding is used to finance a startup's early stages, while Series A funding is used to finance a startup's growth. Both are important stages of venture capital investing, and each has its own advantages and risks.
