What are the financial stages of a startup?

I am pivoting my blog towards writing more on startups and investing.

This blog post examines what happens at each step along the path of a startup as it grows from a speck of an idea into a living, breathing organism with the potential to build meaningful wealth and change the world.

Stage 1: The entrepreneur puts in their own money as first cash in the business

The second reason is that investors want to know that the entrepreneur believes in his own startup. And the best proof of this is to show that he has put his own money in. Any cash invested by the entrepreneur will remain in the company as founders’ equity, and will come back to him only at the time of a successful exit in which the other investors make money.

Investors want entrepreneurs to have what is known as skin in the game; that is, an amount of their own capital serious enough for them to pay close attention to, but not so much that they will be distracted by having to worry about where their next meal is coming from.

It is likely that the first money into a company, up to $25,000 or $50,000, will come from the entrepreneur directly.

Stage 2: The first outside capital is often raised by friends and family

The important thing is that the money should probably go into the company directly as a convertible note that will convert into the same security as the next professional round, but with a discounted conversion price. However, depending on the personal relationships involved (and on whether or not the family member is an Accredited Investor), the money might actually go in as a personal loan to the entrepreneur. The loaned money would then be invested by the founder as equity in the company, but must be repaid even if the company fails.

Stage 3: The entrepreneur begins fund raising

Stage 4: The entrepreneur should consider applying to one of the new breed of accelerators.

Stage 5: Enter the angels, either independentally or in groups

Angel groups are an interesting and useful way for new angels to get their wings wet. There are hundreds of these groups across the United States and around the world, and the majority of them accept applications from entrepreneurs over the transom through Gust (although, of course, a personal connection is always valuable). An invitation to come in for a preliminary screening by an angel group provides the entrepreneur with an opportunity to present her business to experienced investors, yielding pitching experience and solid feedback on the business plan.

Stage 6: Venture capital and series A crunch

Stage 7: Growth capital and letters beyond B

At this point, the role of the early angel investor will change dramatically. In the early days of the company’s life, angels are perceived as heavenly beings bringing cash, validation, advice, connections, and other good things. They may have a seat on the board of directors, and may get used to speaking with the entrepreneurial CEO every few months, or even weeks. This close relationship begins to weaken when the venture fund comes along, at which

point the angel will probably step down from the board. By the time the later-stage fund enters the picture, to the entrepreneur the angel is typically only a fond memory of days gone by. But like children leaving the nest after college, this is generally a good and natural thing, freeing the angel to get involved with the next generation of startups, and letting the company play in the big leagues. Provided the initial investors haven’t been overly diluted by this point, this is normal and not something that should be resisted.

Stage 8: The public or private exit

Although the foregoing steps comprise the canonical progression of startup financing, keep in mind that the number of companies that go all the way through it is very, very small. A majority of companies started in the United States begin and end with the first stage: the founders’ own money. The number of companies able to get outside funding then begins to drop by orders of magnitude: the percentages (again, very rough) are that 25 percent of startups will get friends-and-family money; 2.5 percent will get angel money; 0.25 percent will get early-stage VC money; and probably 0.025 percent will make it to later-stage VC funds, with only one or two dozen startups (out of the 600,000 that started) making it to an IPO.



Building nextgen real estate platform at PriceHubble & podcaster at productlessons.com. I blog about products, business around products, and growth strategies.

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Ravi Kumar.

Building nextgen real estate platform at PriceHubble & podcaster at productlessons.com. I blog about products, business around products, and growth strategies.