Start-Ups: Rounds of Financing by Phase

The funding and funding instruments of the Federal Ministry for Economic Affairs and Energy and the ERP Special Fund are based on the first three development phases typical of innovative start-ups.

The Pre-Seed, Seed and Growth phases come from the vocabulary of venture capital financing and describe the development phases of start-ups.

Pre-seed describes the period before the foundation. In this phase, the founding team is formed. People interested in start-up get together or seek out fellow combatants to cover all the necessary skills. The business model is being developed. The product sketch is continued, possibly even up to the prototype. The founding team writes its business plan or business canvas, clarifies further financing and contacts potential investors. Pilot customers, sales and cooperation partners and employees who are necessary for further product development are acquired.

The capital requirement varies depending on the product. For research-based start-up projects, which are also associated with the production of a prototype, the financing requirements are comparatively high. Public support programs are available for the pre-seed phase.

Seed phase: The company is founded, further detail adjustments are ideally made in consultation with potential clients on the product. The business plan will be adjusted on an ongoing basis and, depending on the growth momentum, contacts with investors for the next round of financing will have to be established. Employees are hired. First steps are taken to launch the product on the market – nationally and possibly also internationally. Marketing and sales must be expanded.

In this phase costs for the establishment of the company and the related consulting services. Most importantly, further efforts are needed to further develop the product and promote marketing. In addition to public funding, business angels are available with capital and know-how. In addition, crowdfunding may be an option.

Growth phase: The company continues to expand its production and, above all, its distribution. Further employees are hired. Access to international markets is becoming increasingly important. Additional investors come on board. Sales are up, but profits are not usually made. In this development phase, however, the start-up should at least reach break-even.

The investment needs in this phase are concentrated on the expansion of sales and the further development of the products. The financing is provided by business angels or VC companies and can be flanked by public funding.

The designation of the phases is not “carved in stone”. Occasionally there is talk of Early Stage under which the seed phase and start-up phase are summarized. The growth phase can also be referred to as the expansion stage or growth phase. Each phase is different in duration and takes a few months to a few years, depending on the pace of development of the business.