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Round after round: all stages of a startup choosing to do equity crowdfunding

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Every startup represents a world, a unique and unrepeatable story that is defined by the entrepreneurial idea, the reference sector, the business model adopted, the team and all those factors that influence the history of companies as well as that of people.

While each startup is unique, there are common traits that can be traced back to the different stages of maturity that the company goes through. All the more so when we read the history of a startup from the point of view of access to financing instruments, we can identify precise and universally recognised phases. These phases are called Bootstrap, Pre-Seed, Seed, Early Growth and Exit.

In equity crowdfunding, each phase corresponds to a certain level of funding and a different stage of growth of the company itself.

Let’s see together the characteristics of the different phases.

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Bootstrap: He who finds a friend finds a treasure

The bootstrap phase can be seen as the embryonic moment of the business idea. In this phase, the entrepreneur draws up a draft of the product and business plan and activates an initial financing phase that mainly relies on either personal funds or the involvement of a network of proximal financiers, the famous three Fs of Family, Friends and Fools.

Pre-seed: let the story begin

Once the very first phase of grounding the business idea has been overcome, the entrepreneur is about to face a critical step: having collected the first funds from the inner circle, the business project must find the strength to develop implementation capacity. At this stage, in order to raise the necessary funds, start-ups generally turn to the so-called Business Angels or equity crowdfunding platforms, activating collections whose value generally ranges from 50 thousand to 150 thousand euros.

Since at this stage the startup will not yet be on the market, there are no objective metrics that can validate the goodness of the project. Therefore, everything is in the hands of the entrepreneur, who will have to embody the business itself, promoting himself and his team to potential backers. It will be crucial for the entrepreneur to clearly explain what use he intends to make of the capital raised and what the next steps are that will lead to a return on investment and to generating the first profits.

When embarking on funding round on an equity crowdfunding platform, it is very important for the entrepreneur to be able to determine as accurately as possible the balance between the economic valuation of his company and the value of the funding round. Underestimating this value would in fact lead to a strong acceleration in the Burn Rate (i.e., the speed at which the capital raised is spent), while overestimating the amounts would risk negatively affecting the credibility for future funding.

At this stage, the valuation of start-ups is in the range of €500,000 to €750,000.

If the valuation is correct and the round is concluded with a success in terms of funding, the entrepreneur must continue to invest in the relational component, updating all the investors, who will then have become real partners, on the progress of the business.

Seed: From fantasy to reality

Once the necessary financial instruments have been raised, the start-up is now faced with the test of the market: the company and its products are now in a position to propose its product to the reference sector to test its response. In this phase, the first validation metrics begin to be produced, the product can be revised and adjusted according to the feedback received from the market, and many investments are concentrated on communication and marketing activities.

The role of the entrepreneur also changes: whereas in the early stages he or she took centre stage, much more space must now be left to the team so that it can develop and oversee the different strategic areas of the business.

For this reason, an important cost item in this phase may be recruitment: the company must ensure that it has a sufficient number of employees with the appropriate skills to support the growth of the business project. It is clear that recruiting represents a heavy cost item that risks rapidly increasing the burn rate of capital.

At this stage, business expansion leads to a startup valuation of between €750,000 and €1.2 million. Consequently, the average value of funding rounds will also tend to rise to values ranging from EUR 100,000 to EUR 500,000. It should be noted that in the seed stage, the funding rounds may be multiple, precisely because the company will be in a period of expansion and internal strengthening and will have to cope with numerous expenses related to recruitment and marketing and communication activities. It is therefore essential that the entrepreneur is able to emphasise the qualities of his team and show the positive results of the first market feedback, in order to keep the investors’ confidence high. It is also a good practice to find companies similar to one’s own on an international scale, the so-called comparators, to use as a benchmark to validate and support one’s results.

Early Growth: verso una crescita feliceEarly Growth: Towards happy growth

Having passed the initial market tests and strengthened the team, the company is now faced with a more mature phase of the business that includes expansion at least on a national level. It is clear that all the metrics gathered, the results obtained and those to come will have to support the credibility of a single macro-objective, namely the scalability of the business. Only by projecting growth dynamics will the company be able to continue to gain the trust of investors and secure the necessary capital to withstand the market.

To this end, it will be essential for the startup to be able to collect all the essential information on the business to be sold to investors and financial advisors, through a process of constant updating on the progress of the business project. This information will in fact be the tool through which new rounds of funding will be possible and thanks to which investors will decide whether or not to trust the company. At this stage, equity crowdfunding raises reach rather high levels of between €500,000 and €1.2 million, reaching peaks of over €3 million. It is therefore clear that the more investors have the opportunity to evaluate a start-up based on the data provided, the more likely they will decide to back it.

In this continuous process of evaluation and re-evaluation, the startup will continue its growth process until it is mature enough to face the last round of funding and then face the last phase, the Exit phase.

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