From a global perspective, startups receive a massive amount of funding. While venture funding – the largest source of capital for startups – declined in 2023, the second quarter of 2023 still saw around US$60.5 billion in global funding. To understand how startups use this funding, you'll need to familiarise yourself with the life cycle of a startup. From the earliest days of ideation and conception to the late-stage period of exponential growth and high revenues, each stage of a startup's journey is funded in different amounts and from different sources.

While there are similarities between startups at the same stage – even when they are in different industries – startups have different timelines for moving from stage to stage. One company might go from the pre-seed stage to initial public offering (IPO) in five years, while another company might have five years between its Series A and Series B funding rounds. And neither of these startups is more likely than the other to succeed in the long term. Moving a startup deftly through the stages of growth requires a real-time analysis of the factors that govern your specific business, without relying too much on what other businesses have done.

Here is an overview of the startup funding stages and the concerns and goals to bear in mind for each stage.

What's in this article?

• What are the startup funding stages?
  
  • Pre-seed stage
    
  • Seed stage
    
  • Early stage (Series A and B)
    
  • Late stage (Series C)
    
  • Exit stage
    

What are the startup funding stages?

The different stages of a startup's life cycle can be broken down in various ways. Some might recognise just three broad stages: the early stage, growth stage and late stage. And while you could place any startup into one of those categories with accuracy, it's more common to define the stages of a startup using a more detailed framework of five stages. This framework is oriented around the progressive funding stages that many startups go through.

Timelines can vary: one startup might spend years in one stage while another spends just a few months there, and others might skip some stages entirely. But startups within each stage share some important traits, which makes this framework useful for gaining a quick, high-level understanding of any given startup. Here are the stages and what startups focus on during each one, as well as how they're funded:

Pre-seed stage

What happens: the pre-seed stage is the first stage of startup growth. In this stage, founders are defining the fundamental reasons why they're forming their new business. They need to articulate what the business is, describe the problems they intend to solve, define their market differentiation and create a plan to execute their vision.

Some of the important questions to consider in the pre-seed stage include:

• What is the problem we're hoping to solve?
  
• What is the solution we're offering?
  
• What market opportunities exist around this problem?
  
• Who are the audiences experiencing this problem?
  
• Who else is currently offering a solution?
  
• How is our new solution different or better than what's currently available?
  
• What does a minimum viable product (MVP) of this solution look like?
  
• What resources are needed to bring the MVP to market?
  

How pre-seed stage startups are funded: personal financing, family, friends, accelerators, crowdfunding, pre-seed funds and angel investors

Seed stage

What happens: the seed stage is all about validating the vision that the founders laid out in the pre-seed stage. This is where the team starts to test the core business idea, learn at each step of the way and refine the approach. Most companies only earn a small amount of revenue during this stage, but the goal is to grow slowly while exploring the business direction.

For most startups, the seed stage focuses on the concept of product-market fit. Product-market fit means satisfying a need for a specific audience. It answers the question, "Does what we're offering fit perfectly into its unique spot in the market?"

Product-market fit is a complex concept to apply to a specific business, which is partly why it's the focus of seed-stage activity. Startups typically use seed funding to prove that product-market fit exists – and then they use these proof points to raise additional funding during a Series A round in the early stage. But before startups can assess whether they are on the right track to achieving product-market fit, they have to define what that would look like and decide which performance metrics would accurately measure whether they've accomplished it. By the end of the seed stage, startups should have a strong idea of what to do, how to do it and how to measure success.

How seed-stage startups are funded: Seed funds, syndicates, angel investors, venture capitalists (VCs)

Early stage (Series A and B)

What happens: while the seed stage is primarily about exploring and validating a startup's approach to solving a specific problem for a specific market, the early stage is where startups execute their go-to-market (GTM) strategy, start operating more fully on a commercial basis and grow revenue.

With a stronger understanding of the business needs and opportunity areas, startups usually recruit more employees during this stage. The goal is to build on the seed stage to bring the business fully to life – and get it primed to scale.

How early-stage startups are funded: early-stage funding rounds include the Series A and Series B rounds, which are typically led by VCs and corporate VCs

Late stage (Series C)

What happens: late-stage startups have been in operation for several years and have become an established player in their market space, with considerable revenue. They are focused on two overlapping concerns: growth and an exit strategy. Late-stage startups are doing whatever they can to increase their valuation sustainably ahead of an exit. During this time, startups might explore some or all of the following growth methods:

• Diversifying the types of products or services they offer
  
• Breaking into new market segments that are adjacent to their primary market
  
• Acquiring other businesses, often smaller competitors or niche startups with specialised products or services that add a relevant new dimension to their own offering
  

How late-stage startups are funded: late-stage funding rounds include the Series C round and any subsequent series, which typically include investments from VCs, private equity firms, growth firms, corporate VCs, family offices and sovereign wealth funds

Exit stage

What happens: a startup can have two types of favourable exits: an acquisition or an IPO.

• Acquisition
  In an acquisition, one company is purchased by another company. When this happens, the company that is purchased, along with its assets and intellectual property, becomes a legal part of the company that purchased it.

• IPO
  An IPO is what happens when a startup "goes public". Startups are privately held, but after an IPO, they become publicly traded companies and anyone can buy stock in them.

In both acquisitions and IPOs, the startup's valuation sets the terms. During an acquisition, the valuation determines the sale price. When a startup goes public, its valuation at the time of the IPO determines what the stock price per share will be.

Valuation is based on revenue and growth, but there's no formula that can universally determine every startup's valuation. There are different ways to calculate a startup's valuation, and agreeing on the right method is an important part of the negotiating process.

How startup exits are funded: acquisitions are usually paid for with a mix of cash and stock. In the case of an IPO, a company stops being private, allowing the general public to purchase stock. Some IPOs are "funded" by one or more banks that put up money to buy the shares of a company just before it's listed on the stock exchange.

How Stripe Atlas can help

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Accepting payments and banking before your EIN arrives

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Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g. copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at $100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal Income taxes. Atlas will file it for you – whether you are a US or non-US founder – with USPS Certified Mail and tracking. You'll receive a signed 83(b) election and proof of filing directly in your Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world's leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects such as ownership structure, equity distribution and tax compliance.

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