From Seed to Unicorn: The Startup Investment Cycle
Turning an idea into a unicorn — the affectionate nickname for startups valued at more than US$1 billion (R$5.6 billion) — is a common dream, but one that is hard to achieve. To achieve this, you need much more than just a good product or service. You also need to convince investors to invest in your project.
In the business world, raising funds is essential to boost growth, especially for those that are still in their early stages. According to the innovation platform Distrito, Brazilian startups raised US$1.46 billion (R$8.29 billion) between January and September 2024. In total, 313 deals were closed.
The value represents a growth of 9.5% compared to the same period in 2023, but is still five times lower than that recorded in 2021, when lower interest rates made access to credit and capital cheaper for investors.
Unknown and competing for the money and attention of major investors, new companies compete fiercely for investors’ capital. But no one goes from zero to a billion in just one round of investment. In general, companies have a long way to go in their useful life.
What is a startup?
Startups are the name given to a company that is still in its early stages. In most cases, these new ventures seek to develop an innovative, scalable and repeatable business model, operating under conditions of uncertainty.
Their main focus is to solve a problem or meet a market need in a different way, often through emerging technologies or disruptive approaches. This is what sets them apart from a traditional company — their ability to test and validate new hypotheses about their product, market and business model, and adapt quickly to changes.
They operate with limited resources and, therefore, seek external investments, such as investment rounds to finance their development, growth and, in some cases, their own creation.
Fundraising occurs through contributions of third-party capital. This is not a loan but rather an investment with the purpose of participating in the company’s future earnings.
Capital raising rounds occur at different stages in a startup’s life cycle. REAG Asset’s Head of Capital Partners, Thiago Domenici, points out that each stage is characterized by the project’s level of maturity, the amount of capital required and the profile of the investors involved, reflecting the specific objectives of each stage of growth.
Alphabet soup
Capital raising rounds occur at different stages in a startup’s life cycle. REAG Asset’s Head of Capital Partners, Thiago Domenici, points out that each stage is characterized by the project’s level of maturity, the amount of capital required and the profile of the investors involved, reflecting the specific objectives of each stage of growth.
Following this logic, the tendency is for the amount raised to increase as the business proves itself to investors. Initially, the resources raised are directed towards validating the business model, developing the product or service and winning over the first customers. In subsequent stages, the resources are used to expand operations, expand into new markets, improve technologies and increase the team.
In general, there are five main types of investment rounds for startups. In their more advanced stages, they become known as “series” and the names follow alphabetical order.
Check out some of them:
Pre-Seed: Carried out when the idea or product is still in the prototype phase and the amount raised is used to conduct market research and develop an MVP (Minimum Viable Product). Investments are smaller and often come from programs that help startups grow quickly in a short space of time (accelerators and incubators) or from angel investors — entrepreneurs or companies that invest their own money in the initial project in exchange for an equity stake.
Seed: The seed round occurs when a startup seeks to validate its business model and begin to gain traction in the market. The investment is used to acquire the first customers, improve the product and establish the foundations for growth. Angel investors and Venture Capital funds focused on early stages participate in these operations.
Series A: The startup has already demonstrated traction and has a product or service with proven demand. The goal is to scale the business, optimize the revenue model, and expand the team. Venture capital funds provide significant capital to drive growth.
Series B: Focuses on large-scale expansion. The company already has a solid position in the market and seeks to grow quickly, whether by entering new markets, expanding its product offering or increasing its presence. The business is already sustainable and presents solid performance metrics. Venture capital and growth funds (a set of strategies focused on the rapid and scalable growth of a company) are more active at this stage.
Series C, D and later: Intended for mature companies seeking exponential growth, diversification or preparation for liquidity events such as a stock market debut through an IPO (Initial Public Offering) or acquisitions. Investments are substantial and often involve growth and private equity funds. The proceeds can be used for acquisitions, internationalization or new product development.
Mezzanine and Pre-IPO: These occur when the company is preparing to go public or be acquired. The capital is intended to optimize the financial structure, comply with regulatory requirements and strengthen the market position before the liquidity event.
Although investment rounds are a common and perhaps the best-known form of financial support, they are not the only option available. Startups can resort to bootstrapping, self-financing their operations with their own resources or reinvesting initial profits.
In addition, they can access bank loans, specific lines of credit for small businesses, FIDCs ( Credit Rights Investment Fund) , to anticipate receivables.
“Crowdfunding allows startups to raise capital through contributions from multiple people, either in exchange for products or equity in the company. Another alternative is strategic partnerships with established companies or venture debt deals, which combine debt and equity features,” says the head of Capital Partners at REAG Asset.
Who invests in startups?
Venture capital (VC) funds, which adopt a strategy of investing in early-stage companies with great growth potential, are usually the best-known financiers. They participate in the first rounds, such as Pre-Seed, Seed, Series A and Series B.
“As the company matures and reaches more advanced stages, Venture Capital funds can start to exit the capital structure by selling their stakes in subsequent rounds to new investors, such as growth and private equity funds,” explains Domenici. The search for returns is usually for the medium and long term, from 5 to 10 years of operation.
“When a company seeks venture capital during its fundraising, it is looking for investors who will inject money in exchange for an equity stake. Venture capital is, therefore, one of the methods that startups use to raise funds during the fundraising process. The investment round is a specific stage within the fundraising process,” explains Lorenzo Barbati, executive director of GVAngels, an organization of the Getúlio Vargas Foundation focused on startups.
To invest in VC, you can participate as an angel investor, providing capital directly to early-stage startups. Another way is to invest through venture capital funds managed by professional managers.
“Equity crowdfunding platforms allow individual investors to make smaller contributions to startups, democratizing access to venture capital,” says the expert, but it is necessary to differentiate between the two categories of contributions.
Another important difference is between venture capital and private equity funds. Both are forms of investment in private companies, but they differ in the stage of development of the companies and the investment strategy.
