Startup Funding Journey: w/ Airbnb Example (2024)

Funding is the process of securing financial resources that a startup needs in its early stages or during its growth journey. Startups require funding to bring their new ideas to life, develop their products, expand their markets, and execute their operations. This funding is typically sourced from external investors, angel investors, venture capital firms, or private equity companies. Funding enables startups to realize their growth potential while also presenting significant opportunities for investors. Investors have the chance to enhance their returns by backing a successful startup, while startups accelerate their growth to gain a competitive edge. Therefore, funding is one of the cornerstones of the startup ecosystem and is crucial for the sustainable growth of entrepreneurship.

Now, let's delve into the rounds!!!

Fast Fact 

The Pre-Seed Round is typically funded by small amounts of financing from entrepreneurs themselves or from family and friends, as well as from angel firms and early-stage venture capital. This stage is centered around validating the business idea and creating the foundational prototype. 

The Pre-Seed Round marks the earliest financing stage for a startup, typically when the venture is still in the ideation phase and just beginning the product development process. At this stage, entrepreneurs conduct foundational research to bring their business ideas to life. Usually, companies seek funding at this stage to validate their ideas, create prototypes, and gather early customer feedback. Pre-seed funding is often sourced from smaller investor groups like the entrepreneurs themselves, their families, and close contacts, as well as early-stage venture capital firms and angel investment platforms. Companies typically use this funding to translate their ideas into reality, establish the groundwork for future investment rounds, develop Minimum Viable Products (MVPs), and conduct Proof of Concept (PoC) with potential partners or customers.

During the Pre-Seed Round, investors and companies may not necessarily adhere to specific criteria. For instance, achieving a certain revenue level, having a particular user base, or reaching a specific growth rate may not be expected at this stage. Instead, because companies are typically in the phase of validating their ideas and creating a foundational prototype, investors often focus on the vision and capabilities of the entrepreneurs, as well as their backgrounds and motivations.

In the Pre-Seed Round, companies typically raise relatively modest amounts of capital, often coming from the entrepreneurs' own funds or from family and friends. Therefore, the amount of money raised and the percentage of equity given to investors in the Pre-Seed Round is generally lower compared to other financing rounds.

Fast Fact 

The Seed Round is the first stage of early-stage financing for a business, typically used to validate the business idea and fund product development. Funding ranges from thousands to millions of dollars, with equity allocation based on funding amount and company value. VC firms typically aim for a 10% to 20% stake despite variations. 

The Seed Round marks the first formal stage of early-stage financing for a business. Typically, at this stage, the company may still be in the idea or prototype phase or may have already commenced commercial operations. The purpose of the Seed Round is to provide initial capital to the business. Companies usually seek funding at this stage to validate their ideas, develop their products, and build their initial customer base. Seed funding is typically provided by angel investors, venture capital firms, and private investors.

During the Seed Round, investors and companies may not necessarily adhere to specific criteria. However, companies typically should have created a prototype to validate their ideas and have a plan in place to initiate their operations. Investors often focus on the entrepreneur's vision, the novelty of the business idea, and the capabilities of the team. A VC firm will look to have a 10%-20% stake in the company at this stage, while a group of angel investors/pre-seed will look to get a 5–10% stake.

In the Seed Round, companies typically raise amounts ranging from a few hundred thousand dollars to several million dollars. This amount varies depending on the company's needs and the interests of investors. Companies generally use the funds raised at this stage to launch the business and finance initial development activities. The amount of equity given to investors is determined based on the relationship between the total funding amount and the value of the business.

Fast Fact 

Series A rounds, succeeding angel investments, involve companies offering shares in exchange for capital. Traditionally, these rounds are led by venture capital firms, aiming to acquire ownership stakes ranging from 15% to 25% in startups. 

Series A, typically following the angel investment stage, is a financing round where the company offers shares in exchange for capital. At this stage, the company begins to prepare for future business growth, optimizing operations, using funds to balance financial losses or address deficiencies, further developing its product or service, and creating a scalable plan for growth.

In the Series A round, investors are not just looking for great ideas; they are also looking for companies with a strong strategy to turn those ideas into successful, profitable businesses. Companies typically attract attention in Series A financing rounds with valuations up to $50 million and investors participating in this round often come from more traditional venture capital firms. Regardless of geography, Series A rounds are led by traditional Venture Capital firms that like to own between 15 and 25% of the startups.

Series A rounds typically raise capital ranging from $2 million to $15 million, although this figure varies depending on several factors. The average Series A funding amount was recorded at $22 million in 2023. Investors involved in this round typically come from more traditional venture capital firms such as Sequoia Capital, IDG Capital, Google Ventures, and Intel Capital, evaluating the company's long-term growth potential.

Fast Fact 

Series B is a financing round used by developing companies to grow and expand their operations. At this stage, companies have a solid foundation, and investors typically expect returns based on the company's growth potential. 

Series B is a financing round used by companies to move beyond the development stage. At this stage, companies typically have a solid user base and steady revenue streams. The Series B round helps businesses achieve goals such as expanding market access, increasing market share, and building teams for business operations.

Companies in the Series B round have usually demonstrated strong product-market fit and proven to investors that they can succeed on a larger scale. At this stage, businesses use Series B financing to grow by expanding market access and meeting demand levels. Valuations of companies in the Series B round are typically around $35 million, guided by lead investors and a range of venture capital firms specialized in later-stage investments.

In the Series B round, companies typically raise capital ranging from $15 million to several hundred million dollars. Investors in this round tend to favor investments based on a company's strong business model, growth potential, and scalability. Particularly considering that companies still have significant growth potential in the Series B stage, investors generally expect to see returns on their investments.

Fast Fact 

Series C financing is the next step for companies progressing along the growth path and typically focusing on global expansion. At this stage, attracting investors is often easier because they have proven to have a successful business model, and funds are generally used for purposes such as developing new products, reaching new markets, and acquiring other companies. 

Series C and beyond stages represent advanced phases in a company's growth journey. At this stage, companies have typically demonstrated significant growth and begun to establish themselves as leaders in the market. The Series C round is often used with goals such as international expansion, new product development, and increasing market share. Companies at this stage often prepare for an IPO (Initial Public Offering).

In Series C and beyond stages, companies generally must have reached a certain revenue level and growth rate. Additionally, they should have identified expansion strategies, possess a robust business model, and hold a leading position in the market. Investors focus on the company's long-term profitability and sustainable growth potential at this stage.

In Series C rounds, companies typically raise capital ranging from tens of millions to hundreds of millions of dollars. This amount varies depending on the company's growth objectives, market share, and valuation. The percentage of equity given to investors is also determined by the amount of capital raised and the company's valuation.

Fast Fact 

IPO stage enables a company to initially make its privately-held shares public, providing access to a broad investor base and increasing the company's growth potential. 

IPO, or Initial Public Offering, is a stage where a company's shares are first offered to the public and can be bought and sold by the general public. This process allows the company to raise capital for further growth or enables the founders to convert their remaining shares into cash for personal gain.

To conduct an IPO, companies typically form an IPO team, which includes SEC experts, lawyers, accountants, and brokerage firms. Information such as the company's financial status and future operations is compiled, financial statements are audited, and applications are submitted to the SEC.

During the IPO stage, companies often use large amounts of capital to enter new markets, make acquisitions, and develop new products for growth. At the same time, many founders benefit from the proceeds after growing the company and may step down from the company, handing over management to an experienced CEO.

Startup funding can extend beyond traditional investment rounds and venture capital. Here are some alternative methods for funding a startup:

Loans: Entrepreneurs can opt for loans to acquire a significant amount of upfront capital. While loans provide immediate funds, they also incur debt that may not exist with investor funding. 

Crowdfunding: Crowdfunding involves raising funds from a large number of individuals, often customers, who contribute small amounts of money. While successful crowdfunding campaigns can generate substantial revenue, attracting attention without an existing customer base can be challenging for new startups. 

Bootstrapping: Some startups choose to self-fund, either by adopting a long-term approach to organic growth or by using personal savings. Bootstrapping is a common starting point for many startups, but founders often realize the need for external funding to facilitate substantial growth. 

Airbnb has undergone various investment rounds since its inception. The company initially began operations with a small funding from its founders in the pre-seed stage. Later on, Airbnb received its first investments in the seed round to validate its emerging business model and potential. At this stage, the company raised around $20,000 to validate its ideas, develop its products, and build an early user base.

Following the seed round, Airbnb secured a significant investment in the Series A round. In the Series A round, the company's business model and growth potential were further validated, and the funding, approximately $7 million, was used to support Airbnb's expansion into broader markets and facilitate rapid growth.

Subsequently, the company continued its growth journey with the Series B round. The Series B round aimed to increase Airbnb's market share, develop new products, and expand internationally. With an increased valuation and funding amount, the Series B round attracted participation from major institutional investors like Tiger Global Management, T. Rowe Price, and Wellington Management.

In the Series C round, Airbnb received an even larger investment. This round was used to accelerate Airbnb's international expansion, enhance its growth potential, and strengthen its leadership in the market. The Series C round also contributed to preparing Airbnb for its initial public offering (IPO).

Finally, Airbnb successfully went public through an initial public offering (IPO). An IPO allows the company's shares to be publicly traded for the first time, enabling them to be purchased by the general public. Airbnb's IPO was a milestone in the company's growth journey, opening up new growth opportunities by providing access to a broader investor base. Leading investment banks such as Morgan Stanley, Goldman Sachs, and Allen & Company were among the key financial advisors during the IPO process.