The Venture Investment Cycle: An In-Depth Look at Early-Stage Investing Stages
How do groundbreaking ideas turn into successful businesses?
With over 50 million new startups launching every year (on average, 137,000 startups emerge every day!), competition is constantly high, and success can be hard to come by (recall that roughly 20% of startups fail in their first year and 60% in their first three).
Venture investment plays a pivotal role in giving an idea the chance to grow.
The journey from concept to market dominance involves a series of well-defined stages, each marked by distinct milestones, funding rounds, and decision-making processes. Let’s walk through a venture investment cycle and its funding sequence:
Ideation
Pre-Seed
Seed Funding
Series A
Series B
Series C and Beyond
But before we jump in, here are a few definitions to become familiar with to guide you through the key highlights of each stage:
Capital Raise: The money a founder secures to support their startup and finance activities to achieve its strategic goals.
Investment Vehicle: Referring to any method by which individuals or businesses can invest and, ideally, grow their money.
Common Shares: The simplest form of equity financing where shares are offered at a price per share agreed upon by the company and investors. Investors receive shares with the same voting rights and the same terms as founders and employees holding stock options.
Convertible Preferred Shares: An ownership position in the startup is provided to investors (VCs and angels) at a price per share agreed upon by the company and investors. Preferred shares will include different rights than common shares, such as greater upside potential and a level of downside protection for their investment.
Simple Agreement for Future Equity (SAFE): A contractual agreement where early-stage startups can fund their business without valuing the company or giving up equity initially. The investor gives the company cash in exchange for the right to buy equity in the company after a triggering liquidity event, which is typically the next funding round. SAFEs set out conditions and parameters for when and how the capital will convert into equity without accruing interest or having a maturity date.
Convertible Note: A loan that carries interest and eventually converts into preferred stock after a maturity date or triggering event. Similar to a SAFE, a convertible note lets early-stage startups raise money without giving up equity straight away or having a valuation. Being a loan, the startup company takes on debt, but instead of paying back the loan in cash, the company has the option to pay off the convertible debt with equity after a conversion event.
Traction: The measure of the momentum a business has and how well it is performing—AKA a startup’s opportunity to tell investors how far they’ve taken their business up to a certain point and what differentiates them from the pack.
1. Ideation: Sparking the Flame of Innovation
The fresh start: entrepreneurs embark on a creative journey to conceive revolutionary concepts. Right now, the company itself is little more than an idea, where not taking action beyond this point means it would just sit there waiting for someone else to think of it and bring it to life.
Ideation is the birthplace of innovation, and individuals are identifying market gaps, unmet needs, or disruptive technologies that can form the foundation of a startup. At this stage, it’s important to be sure that there’s a problem solution fit. Is this a real problem clients would pay to fix?
Ideation is crucial as it sets the groundwork for the entire venture investment cycle.
Key Highlights:
Capital raise: Up to $250K
Investment vehicle: Common shares; personal loans
Most Common Investors: Self-funded (bootstrapping); friends & family
Traction: Initial concept; identification of prospective customers and market opportunity
2. Pre-Seed: Nurturing the Seedlings of Innovation
The ideation stage isn’t always traditionally seen as a funding stage, but the pre-seed phase certainly is. Startups entering the pre-seed phase are beginning to shape their concepts into tangible business models.
This is the riskiest stage of the venture investment cycle as most entrepreneurs in this situation have yet to get a product to market and may not have anything more than a prototype. However, this can also be the stage where the most disruptive and innovative startups are born.
Entrepreneurs often tap into their personal resources, secure grants, or engage with incubators and accelerators to refine their ideas. Pre-seed funding bridges ideation and formal seed funding, providing the necessary resources to develop a compelling proof of concept.
Key Highlights:
Capital raise: $250K - $1M
Investment vehicle: Convertible note; SAFE
Most Common Investors: Friends & family; angel investors; high-net-worth Individuals
Traction: Initial prototype; beta customers in target segments
3. Seed Funding: Sowing the Seeds of Innovation
Family and friends, work colleagues, or angels are convinced to put some money into an idea: the seed (aha!) has been planted to secure capital supporting the founder’s vision.
At this burgeoning phase, a startup now has a degree of experience with a developed minimum viable product (MVP) that demonstrates that idea’s feasibility and potential to develop into a vibrant company.
Seed funding fuels critical activities such as product development, market research, and initial team building. Investors at this stage take calculated risks based on the team's expertise, market potential, and the uniqueness of the idea.
Key Highlights:
Capital raise: $1M - $5M
Investment vehicle: Convertible note; SAFE
Most Common Investors: Friends & family; angel investors; high-net-worth Individuals; micro VC (< $50M)
Traction: Strong usage by early customers; proof-of-concept (POC) convert to customers; monthly recurring revenue (MRR) between $25K - $100K
4. Series A: Nurturing Growth and Traction
Once startups move past the initial seed round and prove some kind of traction—whether that’s number of users, revenue, views, or whatever KPIs they've set—raising a Series A funding round helps lift them to the next level.
As the startup demonstrates growth and market viability, venture capital firms take a keen interest, providing larger injections of capital to fuel further expansion.
Startups utilize these funds to enhance their product, scale operations, and build a customer base. Investors in Series A funding focus on metrics such as user engagement, revenue growth, and market penetration, as well as expanding the team and optimizing business operations.
Key Highlights:
Capital raise: $5M - $15M
Investment vehicle: Convertible series A preferred shares
Most Common Investors: Angel investors; early-stage VC funds ($50M - $300M)
Traction: Product-market fit achieved; strong customer growth; management team in place; annual recurring revenue (ARR) of $2M; 3X year-over-year (YoY) growth
5. Series B: Accelerating Towards Dominance
A startup ready to raise a Series B round has already found their product-market fit and needs help expanding. With a proven product and a clear path to profitability, startups enter the Series B stage seeking substantial funds for rapid expansion.
This phase is characterized by aggressive growth strategies, entering new markets, and solidifying the company's position as an industry leader. At the same time, founders are addressing unique scaling challenges, such as balancing growth with operational efficiency and maintaining a strong company culture.
Investors at this stage closely examine the startup's ability to capture a significant market share and maintain a competitive edge.
Key Highlights:
Capital raise: $15M - $25M
Investment vehicle: Convertible series B preferred shares
Most Common Investors: Institutional VC; corporate VC funds; private equity
Traction: Expansion of product lines; proven customer acquisition channels; ARR of $6M+; 3X YoY growth
6. Series C and Beyond: Reaping the Fruits of Success
Congratulations to entrepreneurs at this stage for being on a successful growth path! As the startup continues its ascent, future funding rounds (Series C, D, and beyond) become vehicles for refining the business model, pursuing strategic acquisitions, and preparing for potential exits.
These rounds typically involve significant capital injections from established institutional investors and private equity firms while keeping founder equity in mind—balancing founder ownership with the dilution caused by multiple funding rounds. Startups may also consider an initial public offering (IPO) or acquisition by a larger company.
Key Highlights:
Capital raise: Over $25M
Investment vehicle: Convertible series C preferred shares
Most Common Investors: Late-stage VC funds; sovereign wealth funds; hedge funds
Traction: Market-leading tech or platform; customer trust; predictably profitable; ARR of $15M+; 2X YoY growth
Decision-Making Processes and Investor Involvement
Throughout the venture investment cycle, decision-making processes evolve alongside a startup's growth. Early-stage investors often emphasize the founding team's vision and potential, while later-stage investors focus on tangible metrics, market dominance, and the potential for high returns.
Investor involvement varies across stages as well. Seed investors often provide valuable guidance and mentorship, whereas later-stage investors may actively participate in strategic decisions and governance. Balancing investor expectations and maintaining alignment with the startup's goals are essential for sustainable growth.
Early-stage investing stages form a well-defined trajectory from idea to market dominance. Each phase of the cycle brings unique challenges and opportunities, and startups must adapt their strategies and approaches to meet evolving investor expectations.
With the reality of startups, capitalization paths are as diverse as the ideas themselves. Different types of startups (think: software vs. hard technology vs. the many other sectors) demand distinct capitalization approaches.
For example: software startups, agile and quick to develop, might find early-stage funding in the form of angel investments or bootstrapping for rapid market solutions. On the other hand, hard tech startups with complex R&D and longer product timelines tend to need larger early-stage funding amounts to refine intricate technologies.
Consider the contrast between the Mercato AI vs. Summit Nanotech:
As of March 2023, Mercato AI, a Calgary-based construction intelligence platform, has raised $4.46 million USD in total funding, including a $1 million CAD pre-seed round in June 2022.
In January 2023, Summit Nanotech, a Calgary cleantech startup, closed a $50 million USD Series A2 round, bringing the total funding since inception to $72 million USD.
With just a difference of two years from being founded (Mercator AI in 2020 and Summit Nanotech in 2018) as different startup types, they have both been incredibly successful—each on their respective capitalization paths. As mentioned, as a function of Summit Nanotech being hard tech, it takes more money and a longer timeline.
Understanding the nuances of each stage and cultivating strong relationships with investors are key for startups to navigate the complex world of venture capital and chart a course toward long-term success. Good luck!
Looking to learn more about early-stage investing? Take a peek at a couple of our recommended reads to learn more:
And for more in-depth, immersive learning, registration for the Fall Cohort of our Financial Feminism Investing Lab (FFIL) is open!
Run in collaboration with the Haskayne School of Business, University of Calgary, FFIL introduces participants to the ins and outs of early-stage investing and teaches aspiring investors how their dollars can power the next generation of future-fit, feminist businesses.
*Please note that the information provided in this blog is for informational purposes only and should not be construed as investment or financial advice.
