Startup Funding Stages: The 7 Stages Founders Should Know

Team Digits

Published February 21, 2025

Raising capital for your startup isn’t just about convincing investors to write a check. It’s about securing the right funding at the right time — without taking on bad terms, giving up too much control, or setting yourself up for a cash crunch.

But here’s the challenge: Not all funding rounds are the same. From pre-seed to IPO, each stage comes with different investor expectations, financial realities, and risks.

Luckily, we’ve been through these stages ourselves and know the ins and outs of startup funding. We’ve seen what happens when founders raise too early, wait too long, or agree to terms that hurt them down the line.

In this guide, we share what we’ve learned — breaking down each funding stage, what investors expect, and how to build a financial foundation that sets you up for long-term growth.

What is startup funding?

Startup funding is the money a business raises to build, launch, and grow before it can support itself through profit. This money can come from personal savings, investors, loans, or grants, and each source has pros and cons.

For most startups, investors are the biggest source of funding. Until your business is profitable, you need outside capital to keep the lights on and fuel growth. But investors don’t just hand out money. They’re betting on your potential, and in return, they want something — either equity (a piece of your company) or debt (a loan you’ll need to repay).

The earlier the stage, the riskier the investment. Early funding usually comes from angel investors, seed funds, or venture capitalists (VCs) willing to take a chance. But as you scale and expectations grow, investors want proof that you have a scalable business model and financials that show your company isn’t just surviving but set up to win.

But while startup funding can be a powerful growth tool, it’s not the right move for every business. Before you pitch investors, weigh the pros and cons of investor funding.

Is investor funding right for your startup?

Investor funding can drive growth, open doors, and help you scale faster. However, it also means giving up equity, answering to outside stakeholders, and dealing with the pressure to grow at all costs.

For some founders, bootstrapping — using personal savings or reinvesting early profits to fund the business — is a better fit. It lets you maintain full control and grow at your own pace, though it often means scaling more slowly.

Before you start pitching VCs or angel investors, ask yourself: Is investor funding the right move for me, or would I be better off bootstrapping?

Here are some pros of investor funding:

• Faster growth: Instead of slowly reinvesting profits, investor capital lets you scale quickly by hiring top talent, expanding operations, and acquiring customers faster.
• Larger market opportunity: Some businesses need outside funding to compete in a big market. If your industry has high upfront costs (like SaaS, biotech, or hardware), investor money might be necessary to get off the ground.
• Access to experienced investors and advisors: Good investors bring more than just money. They offer guidance, connections, and industry expertise to help you avoid costly mistakes.

On the other hand, here are some downsides of investor funding:

• Equity dilution: The more funding rounds you go through, the smaller your ownership stake becomes. By the time you hit Series C or later, founders often own far less of their company than expected.
• Pressure for hyper-growth: Investors want returns, which usually means scaling fast, sometimes at the expense of sustainable business growth. If your startup isn’t ready to grow aggressively, VC funding could push you into premature scaling (which kills a lot of startups).
• Loss of control: Bringing in investors means having people to answer to. Major decisions like pivoting your product, hiring executives, or exiting the company might no longer be yours alone.
• Not every business needs it: Some startups raise funding because they think they should, not because they need it. If your business can generate revenue early and scale sustainably, bootstrapping might be a better fit.

Investor funding can be a powerful tool, but it’s not the right move for every startup. Before you start raising, ask yourself:

1. Do you need funding to reach your next milestone?
2. Are you prepared to give up equity and some decision-making power in your business?
3. Do you have a plan to scale quickly enough to meet investor expectations?

If the answer to all three is yes, investor funding might be the right path. If not, it’s worth considering other ways to grow.

The 7 stages of startup funding

You've probably heard of a company raising pre-seed funding or completing a Series B. But what do these really mean — and what actually goes into each of these stages?

Below, we dissect the seven stages of startup funding so you know how to win over backers no matter what stage you’re at.

1. Pre-seed funding

Pre-seed funding is the very first stage of startup financing. This is the money that helps founders validate their idea, build an early prototype, and cover basic expenses like first hires or product development.

At this point, there’s no revenue to speak of, so investors are betting on you — the founder. You’ll need a strong founding team, a big market opportunity, and a well-articulated plan to secure funding for your fledgling company.

Where does pre-seed funding come from?

In the pre-seed stage, you won’t be pitching big-name VCs. Most pre-seed funding comes from:

• Friends and family: People who believe in you enough to invest early, often with minimal formal agreements.
• Angel investors: Individual investors willing to take a high-risk bet on promising founders.
• Startup accelerators and incubators: Programs like Y Combinator or Techstars that provide funding in exchange for equity and mentorship.
• Bootstrapping: Many founders self-fund using personal savings to get their dreams off the ground.

What investors expect at this stage

Startups at this stage are still a long shot. For this reason, pre-seed investors expect to see an x-factor that makes your startup a real diamond in the rough worth risking capital on. That’s why they’re focused on aspects like:

• The founding team: Do you have the skills, experience, and determination to build something big?
• The market potential: Is this solving a real problem in a space that can support a high-growth business?
• The next milestone: What will this money actually get you? Typically, pre-seed funding is meant to get a startup to either its first paying customers, a working prototype, or enough validation to raise a seed round.

2. Seed funding

Seed funding takes the idea you sold in the pre-seed round and proves it can grow into a real business.

You likely have a prototype, some early customers, and maybe even revenue, but you’re still a very small outfit. Seed funding will help you find traction in the market by refining your product-market fit, expanding your team, and reaching new markets.

Where does seed funding come from?

Seed funding is the first real investment round for many startups. It typically comes from:

• Angel investors: Individual investors still play a role at this stage, but they’re often writing larger checks than in pre-seed rounds.
• Venture capital firms: Many early-stage VCs specialize in seed-stage startups, providing funding in exchange for equity.
• Startup accelerators: Some startups join accelerator programs at this stage to get additional funding and mentorship.
• Crowdfunding: Platforms like Republic and Wefunder allow startups to raise money from a large pool of individual investors.

What investors expect at this stage

Investors want proof that your business has more than just a clever idea. They’re looking for:

• Traction: In the form of revenue, strong user growth, or signs of product-market fit.
• Scalability: A clear growth path beyond early adopters that includes expanding into a larger market.
• A solid team: A strong founding team with a proven track record working at (or even founding) other successful startups.
• Use of funds: A well-thought-out plan for how the money will help you reach the next major milestone.

3. Series A funding

While seed funding is about gaining traction in the market, Series A is about proving you can turn that traction into a scalable, profitable business. That means fine-tuning customer acquisition costs, improving retention, and showing that your startup is primed for meaningful growth.

Where does Series A funding come from?

Unlike pre-seed and seed rounds, Series A funding is almost exclusively raised from institutional investors, including:

• Venture capital firms: Early-stage VCs lead most Series A rounds, often writing checks between $5M and $15M.
• Corporate venture arms: Some large corporations invest in startups that align with their industry or strategic interests.
• Super angels and micro-VCs: Some high-net-worth individuals and smaller venture firms may participate in Series A rounds, but they would typically make up a minority part of the funding.

What investors expect at this stage

At this point, investors want real proof that your business is scalable. They’re looking for:

• Revenue growth: Most Series A startups generate at least $1M ARR (Annual Recurring Revenue) or have strong growth metrics, such as high engagement rates, retention rates, or explosive user growth.
• Clear go-to-market strategy: A scalable way to acquire and retain customers.
• Vision for the next stage: A plan for how Series A capital will take you to Series B and beyond.

4. Series B funding

Series B funding turns a proven startup into an industry contender.

By now, you have a repeatable business model, strong revenue, and a growing customer base, but you’re still fairly niche. This round gives you the rocket fuel to take on the industry’s big players, whether by expanding into new markets, scaling your team, or accelerating customer acquisition to outpace the competition.

Where does Series B funding come from?

Series B rounds are led by larger, growth-focused investors, including:

• Venture capital firms: The same firms from earlier rounds may double down, but new VCs specializing in later-stage investments often join in.
• Private equity firms: Some PE firms participate in Series B rounds if they see strong revenue potential.
• Corporate investors: Large companies may invest in startups that complement their business strategies.

What investors expect at this stage

Series B investors are backing companies that have already found product-market fit and are focused on scaling efficiently. They want to see:

• Consistent revenue growth: Many Series B startups generate $10M+ ARR and have predictable revenue streams.
• Market expansion strategy: A clear plan for entering new areas or verticals.
• Operational efficiency: Investors want to see that your startup has business processes, team structure, and technology already in place to support significant growth without major disruptions.
• Competitive advantage: Defensibility against competitors, whether through technology, brand strength, or customer loyalty.

5. Series C funding

A startup going for Series C funding is already successful. The goal of Series C is to prove that with further investment, even more success is possible — like acquiring competitors, entering new markets, or preparing for a potential IPO or acquisition.

While Series C is often the last private funding round before a major liquidity event, some startups may go on to Series D, E, or even later rounds. These additional rounds typically happen when companies see opportunities to extend their growth runway, enter new markets, or make strategic acquisitions before going public.

Where does Series C funding come from?

At this stage, funding comes from a mix of institutional investors and large-scale backers, including:

• Late-stage venture capital firms: Growth-focused VCs that specialize in high-revenue startups.
• Private equity firms: Firms looking for companies with strong financials and a clear path to profitability.
• Hedge funds & asset managers: Institutional investors seeking exposure to late-stage startups before they go public.
• Corporate investors: Large companies investing in startups that align with their strategic goals.

What investors expect at this stage

By Series C, investors aren’t looking for risky bets. They want to see how their investment will enable you to make them even more money. Here are a few things these kinds of investors will be looking for:

• High, predictable revenue: Most Series C startups have $100M+ ARR or are on track to reach it soon.
• Proven profitability or a clear path to it: Investors expect strong unit economics and scalable operations. This includes metrics like a low customer acquisition cost (CAC) compared to lifetime value (LTV), predictable gross margins, or consistent cash flow generation.
• Market leadership: A company that’s a clear category leader or has the potential to dominate its space.
• Expansion potential: Whether through international markets, new product lines, or acquisitions, investors want to see major growth opportunities ahead.

6. Mezzanine financing

Mezzanine financing (also known as a bridge round) is a short-term funding option designed to help a startup bridge the gap between its last funding round and a major financial event — usually an IPO, acquisition, or large private equity investment.

At this stage, the company is typically profitable or very close to it, and investors see this as a lower-risk, higher-reward opportunity before a big liquidity event.

Where does mezzanine financing come from?

This type of funding attracts a mix of investors, including:

• Private equity firms: Seeking pre-IPO or acquisition opportunities.
• Hedge funds & institutional investors: Interested in short-term, high-yield investments.
• Venture capital firms: Supporting portfolio companies before a major exit.
• Debt financing providers: Offering loans or convertible debt as a funding bridge.

What investors expect at this stage

Unlike earlier rounds, mezzanine investors are focused on short-term returns rather than long-term growth. They typically look for:

• Clear path to liquidity: A near-term IPO, acquisition, or major funding event.
• Strong financials: Consistent revenue, profitability (or near it), and predictable growth.
• Low risk, high return: Mezzanine investors often receive convertible debt or preferred equity, giving them priority over common shareholders.

7. Initial Public Offering (IPO)

An Initial Public Offering (IPO) is when a private company sells shares to the public for the first time, officially becoming a publicly traded company. This is the final stage of startup funding, giving the business access to public capital markets and providing early investors with a way to cash out.

Going public is a major milestone, but it comes with increased scrutiny, regulatory requirements, and pressure to deliver consistent financial performance.

Where does IPO funding come from?

Unlike previous rounds, IPO funding comes from institutional and retail investors buying shares on stock exchanges. The process is typically supported by:

• Investment banks and underwriters: Firms like Goldman Sachs or Morgan Stanley help set the IPO price, market the shares, and ensure a smooth offering.
• Institutional investors: Hedge funds, mutual funds, and pension funds often buy large blocks of shares before and after the IPO.
• Retail investors: Everyday investors can buy shares once the stock is publicly listed.

What investors expect at this stage

Once public, a company is expected to operate like a mature business, with predictable revenue, profitability (or a clear path to it), and transparency. Investors will look for:

• Strong financial performance: Consistent revenue growth, profitability, and a competitive market position.
• Scalability and market dominance: A clear strategy for expansion, competitive differentiation, and sustainable growth.
• Regulatory and compliance readiness: This can include complying with SEC regulations, reporting earnings quarterly, and maintaining transparency with shareholders.

Why smarter bookkeeping and accounting is key to securing funding

When it comes to securing funding, there’s one thing investors want to see above all else: solid financials. They need to know your numbers are reliable, accurate, and up-to-date so they can invest with confidence. Investors also want to see that you have financial systems in place to scale with their money. If you’re relying on Excel spreadsheets to track everything, investors may not believe that you have the business know-how to use their money as efficiently as possible.

This is one of the reasons we started Digits. With Digits, we built a smarter way to manage your finances by using the power of AI and machine learning to give you faster, more accurate, and more helpful financials.

Here are just three ways Digits helps you make a real impression on your investors at every stage of the startup funding journey:

Real-time financial tracking

Digits syncs with your bank accounts and your entire financial tech stack, keeping your reports updated in real time — no waiting, no hassle. Plus, with built-in automatic transaction classifications, every expense and revenue entry gets sorted for you without manual legwork.

This level of automation means you'll always have the freshest, most organized data at your fingertips, so you can confidently discuss your current growth, cash flow, and revenue metrics. When investors see your numbers this clear and current, they'll know you're ready to scale and make the most of their investment.

Professional reports

Investors appreciate clear, polished, and professional reports that eliminate any guesswork. With Digits, you can instantly generate comprehensive reports that showcase live metrics and detailed financial breakdowns.

These professional reports do more than just catch the eye — they let investors drill down into key metrics that are important to their business, like runways, burn rates, or revenue. That level of transparency shows that you’re running a smart, data-driven operation that is ready to scale.

Customizable dashboards

Every startup is unique — your key performance metrics should reflect that. Digits lets you build customizable dashboards that highlight the specific metrics that matter most to your business — whether it’s cash flow, customer acquisition cost, or revenue growth.

These tailored dashboards provide a quick, real-time snapshot of your financial health, making it easy for investors to grasp your startup’s performance at a glance. This clarity builds trust and demonstrates that you’re prepared to scale and manage growth effectively.

Take control of your startup’s financial journey with Digits

When deciding how to fund your startup, you want to take every advantage. One way to get a leg up on the competition is with financial transparency. When your numbers are clear, accurate, and always up-to-date, investors see a company that’s in control and ready to scale. With Digits, you can finally say goodbye to the chaos of endless spreadsheets and hello to a streamlined, data-driven financial operation.

No matter which funding round you’re in — from pre-seed to IPO — Digits simplifies your financial management so you can focus on growing your business. Ready to take charge of your startup’s financial journey and secure the funding you need to succeed? Book a call with us today and see how Digits can support your startup at every stage of its journey.