A traditional fund raising roadmap for startups

Raising funds is the most critical task for any entrepreneur starting a new business venture. Many startups fail due to insufficient money to support future activities. Prior to the capitalism age, funding for a major adventure relied on support from royal or rich families. This approach could only support a small number of projects. It was hard for adventurers to find a willing sponsor. For example, Columbus sought many European royal families to support his adventure and was turned down. Eventually, Spain's King Ferdinand and Queen Isabella agreed to finance his journey. Then, capitalism came, and along with it came the concept of incorporation. This opened a door to a new way of raising capitals from investors to finance new business ventures. A famous example is the East India Company, which was created by British merchant adventurers in 1600. The company was started with the personal fortunes of the partners. The East India Company later sold company stocks to investors and became the world's first commercial corporation.

More recently, startups are a primary force that's working on new ventures. A startup is a company in its initial stages. It is created by its entrepreneurial founders to develop a product or service that they envision will be in demand. At a startup formation stage, it carries a high risk. VC funds are unwilling to invest in it. Seed money steps up to fill in a gap. A common type of seed money is angel fund. In the late 1990s and early 2000s, dotcom startups were very common. During that time, VCs were very active in investing in dotcom startups at their early stages. At their middle stages, PE firms often provided financial support. When a company becomes established with a tested business model and recurrent revenues, it often goes to the next stage of going public via an IPO. IPO helps the company to raise additional capital from the public investors in order to fund future business growth. Between PE capitals and an IPO, the mezzanine capital can provide funds to bridge a gap. The mezzanine capital is a mix of equity and debt. Its debt part provides an option for a company's owners to obtain funds without further diluting its ownership.

In summary, a traditional funding roadmap for a startup could be as follows:

• Seed money/angel funds: The formation stage
• VC funds: Early rounds of funding
• PE firms: Funding companies at their middle stages
• Mezzanine capital: Bridging to the IPO phase
• IPO: Selling equity stakes to the public for raising capital to support further expansions

In the rest of this section, we illustrate these funding methods.