Visualising Growth: How VCs See Startup Funding, From Pre-Seed To IPO

A startup idea is like a seed that needs nurturing, and institutional investment is the water that provides the required nourishment to help it survive, grow, and thrive. However, while entrepreneurs view investments as their path to growth and success, what do investors see when they’re assessing a potential investee?

The answer depends on the stage of growth of the startup in question. From idea-and seed-stage investments to IPOs, here is taking a look at what investors typically look for during different stages of startup growth:

Idea-stage/Pre-Seed Funding

Startups in the idea stage of their growth, as the name suggests, are little more than blueprints on a drawing board. Investments during this phase are secured largely on the strength of the business idea.

Investors look for strong and disruptive business propositions that can cater to an unfulfilled need-gap and have significant growth potential. Startups looking for funding in the idea stage must ensure that they highlight why their startup idea is a differentiated and valuable business proposition and what kind of growth trajectory it can achieve.

Seed/Angel/Early-Stage Funding

Seed or early-stage funding is often the first investment that many new ventures secure. The capital raised is used to launch the product in the market, speed up recruitment, and increase operational scale. Investors, during this time, are mainly interested in two things. The first is the strength of the idea, which is gauged by the product’s beta-phase traction. Investors, during these early-stage funding rounds, look for a minimum viable product (MVP) that is a good fit for the target market and addresses the challenges faced by its consumers.

Another – and, perhaps, more important – factor is the capability and track record of the founding team. Investors know that strong founding teams can make a success of a non-unique business while a weak founding team will be unable to realise the full potential of even the most disruptive of ideas. Focus on building a strong core team with diversified skill-sets before approaching angel investors for early-stage funding.

Growth-Stage Funding

Series A/B/C investments follow after the product has already received significant market traction and has proven its MVP. These funding rounds accelerate the startup’s growth; the capital raised is used to drive rapid geographical expansion to newer target markets, recruit new team members, and expand the portfolio of product/services offered.

Investors participating in these funding rounds are mainly looking at the company’s future growth potential. Can it continue to expand its operational scale with horizontal/vertical expansion? Can it create a new industry on the back of its unique offerings or will it change the way that an existing sector functions? Is the long-term strategic and business roadmap sustainable? If the answer to these questions is yes, then the startup in question has a better chance of securing an investment during the growth stage.

However, during late growth-stage funding rounds such as Series D/E/F/G, investors begin to focus on an additional factor: a viable exit strategy. Any such investment has investors asking if the startup is planning either an IPO or a corporate takeover in the future that could see their investment return substantial gains.

Initial Public Offering (IPO)

An IPO is a grand finale for startups and investors. The initial public offering of the venture’s corporate shares in the stock market is a validation of the entrepreneurs’ hard work and vision, as well as the faith that their VCs have shown over the years.

The next set of investors comes with similar goals – maximising their capital – even if the parameters to gauge viability are slightly different. During the IPO stage, investors look at the draft red herring prospectus (DRHP), which contains information about financial performance and share distribution. They also evaluate the company’s management and promoters; the better the credentials, the better the chances of garnering interest from retail and institutional investors. Another factor is the grading assigned to the IPO, with higher grading typically improving the chances of the IPO being a success.

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