Here’s Everything You Need To Know About Growth Stage Funding

What Is Growth Stage Funding?

The transition to successfully attaining the product-market fit (PMF) typically marks the beginning of the growth stage for a startup. At this stage, when a startup’s products and services have been launched, it aims to establish a repeatable, scalable and profitable business model. Some key performance indicators of a startup’s growth at this stage are traction, revenue, customer acquisition costs (CAC), customer lifetime value (CLTV) and more. 

Startups seek investor support and capital at this stage to propel growth and focus on unit economics. Series A and B funding are seen as growth stage funding. 

What Are The Typical Funding Amounts For Companies At The Growth Stage?

The funding amounts for startups at the growth stage can vary depending on various factors such as industry, market conditions, growth potential and the requirements of a startup. However, it is common for startups in the growth stage to seek larger funding rounds compared to earlier stages.

Who Provides It?

Growth stage startups can raise funding from a variety of institutional investors. Venture Capital (VC) firms like Stride Ventures, Venture Catalysts, Sequoia Capital India, Omidyar Network India are active in supporting growth stage startups. Besides this, Private Equity (PE) firms, angel investor networks and Corporate Venture Capital (CVC) firms also invest in such startups. 

Here’re The 24 Most Active Investors Who Backed Indian Startups In Q1 2023

How Is It Different From Early Stage Funding?

During the later phase of the early stage, multiple components of a startup start to converge: the management team is fully assembled, the product or service is introduced to the market, and the business starts generating revenues. At this point, startups seek larger funding from angel networks and VC. The growth stage typically starts after two-four years of operation. 

On the other hand, early stage funding is aimed at supporting product development, market validation and initial growth of the company. It helps startups translate ideas into products, launch minimum viable products and build teams. 

Here’s a snapshot of the key metrics that investors look for before providing growth stage funding:

What Are The Advantages And Disadvantages Of It?

Advantages: 

• Scalability & Expansion: It enables businesses to scale operations and expand into new geographies.
• Driving Growth: Funding at this stage allows startups to grow rapidly by investing and ramping up marketing, product development and innovation.
• Market Validation: Funding from marquee investors validates the business and enhances its credibility, attracting more customers and partners.
• Access To Resources: Funding provides access to resources like mentorship, operational support, industry connections and networking opportunities.
• Increased Valuation: It increases the company’s valuation, attracting further investment and favourable exits.

Disadvantages:

• Dilution Of Ownership: Growth stage funding may require giving up equity and reducing the ownership stake of founders and early investors.
• Pressure To Perform: Investors have high expectations and may impose strict performance targets.
• Valuation Expectations: Investors anticipate a high valuation and return on investment, which can be challenging for the startup if expectations are not met.
• Increased Reporting & Compliance: Funding may come with more stringent reporting and compliance requirements.
• Risk Of Instability: Excessive funding can result in hasty expansion without adequate market validation, risking resource and financial strain. 

How Is The Funding Landscape For Growth Stage Startups In India?

Macroeconomic uncertainties, interest hikes and fears of a looming recession have contributed towards the funding slowdown experienced by startups in 2022. According to Inc42’s estimates, growth stage startup funding slipped 4% YoY to $7.75 Bn in 2022 from $8.1 Bn in 2021.

Industry estimates show that the downward trend is likely to continue in 2023. Inc42’s analysis suggests that the Indian startup ecosystem could see 370 growth stage startup funding deals in 2023, up only 4.5% from 354 such deals in 2022. In addition, such deals could touch $7.4 Bn in 2023, 3.9% less than the $7.7 Bn raised in 2022.

Overall, the startup ecosystem has raised $7.8 Bn in growth stage funding between 2014 and 2022.

How Can A Company Prepare For Growth Stage Funding?

While preparing, a startup should prioritise several key areas. These include formulating a clear growth strategy, enhancing financials and metrics, assembling a high-performing team, crafting a compelling pitch deck, cultivating relationships with potential investors, refining the business plan and forecast, optimising operational infrastructure, securing customer and market validation, and preparing for investor negotiations.

How Long Does It Take To Secure Funding?

The timelines can vary from startup to startup. Some businesses may take months to find investors, while others could close a round in a few weeks. 

Failing to meet growth expectations outlined in the funding agreement can have repercussions for your business. It may lead to a reevaluation of the agreement’s terms, potential loss of investor confidence and support, and the need for renegotiation or termination of the agreement. 

Further, investors may seek to understand the reasons behind the underperformance and explore solutions. However, consistent underperformance can strain the relationship and make it challenging to secure future funding.