Bringing a new product or innovative solution to life takes more than just a great idea and technical know-how. For many startups, teaming up with a venture capital (VC) firm is a pivotal step in their growth journey and a key to launching new solutions on the market.
That’s because VCs offer deep market expertise and—most importantly—access to the funding and capital founders need to drive R&D and execute on their product roadmap. By pooling resources from multiple investors, VC firms back companies with high growth potential in exchange for an ownership or equity stake.
This partnership is what makes the startup-VC relationship a win-win for both founders and investors. For example, you might be a first-time founder with a disruptive idea, but little business experience. A VC may be willing to invest their own—and their partners’—capital in your vision in exchange for a share of future profits.
That’s why making a compelling case for your business and clearly communicating your market potential is a crucial Step One when approaching VCs. While VCs often specialize by industry or market, they generally look at the following criteria when evaluating your startup:
- Do the numbers make sense? (i.e., Is there real growth potential for your product?)
- Is your leadership team strong? (i.e., Does your management team work well together?)
- Is your product or service truly unique? (i.e., Are you meeting a real market need or solving a unique problem?)
While not always required, these VC criteria closely align with the requirements for the Scientific Research & Experimental Development (SR&ED) tax credit in Canada and the R&D tax credits (IRC Section 41) available in the United States. To qualify, your business must show you’re conducting R&D with scientific rigor and addressing Technological Uncertainty, if not actively pursuing Technological Advancement.
As a result, having a successful SR&ED or R&D tax credit claim (and securing non-dilutive government funding) can make your company even more attractive to investors.
Here are the five main stages of VC funding most startups go through, along with tips for working with investors before and after the VC cycle.
Pre-seed:
Sources of funding:
- Self-funding or founder investment
- Friends and family
- Angel syndicates or super angels
- Early-stage funds (pre-seed VCs)
- Crowdfunding
- Pre-sales
The pre-seed stage typically lines up with the Prototype phase of your product development. At this point, you and your founding team are still refining your ideas and starting to test product-market fit with potential customers.
During pre-seed, you’re mainly building your case for future VC investment, often seeking advice from other founders or entrepreneurs as you finalize your business plan and develop a minimum viable product (MVP). This is usually a self-funded phase, but it’s also when you start laying the groundwork for investor outreach—including preparing detailed tax studies on your R&D to support claims for non-dilutive government funding.
Many startups also bootstrap their early growth with revenue from pre-sales or by tapping into founders’ personal savings. In these cases, founders often combine their own funds with other sources (like government grants, tax credits, or pre-sales), helping them diversify their financial base and reduce risk before moving to the next growth stage.
Seed stage
Sources of funding:
- Self-funding or founder investment
- Friends and family
- Angel investors
- Seed round VC
To move up to the Seed stage—the first official round of VC funding—you’ll need to show a track record that proves your company’s growth potential. This usually means having a beta or MVP, plus a strong pitch deck outlining your growth milestones and the capital you need, so you can confidently approach investors.
At this stage, you’re entering a new level of business maturity, but seed-stage startups are still looking for funding to accelerate market research, expand the management team, and keep product development moving forward.
It’s important to remember that founders often need to be ambitious with their funding goals at this stage. Your ability to secure capital shows current and future investors that you have what it takes to scale for the long term. That’s why many founding teams end up giving up more equity to investors at this stage than at any other—it’s a way to balance the risk VCs are taking on.
Series A
Sources of funding:
- Accelerators or incubators
- Angel investors
- Venture capitalists/corporate VC firms
- Family offices
- Revenue-based lenders
- Venture debt
At Series A, your business plan is solidifying, you’re building a customer base, and you’re starting to focus on product marketing as you move closer to steady revenue and growth. Key metrics at this stage include: Have you found a proven go-to-market strategy with a clear customer acquisition cost (CAC)? What are your top-line revenue growth, net revenue retention (NRR), and churn rates?
This last point is crucial: VCs and other funders aren’t just interested in how many users you have—they want to see that you can monetize your solution for the long haul.
Angel investors and traditional VCs provide most of the funding at this stage, but you can also look at accelerators or corporate VC funds. Just keep in mind that these investors will expect a strong business plan (meaning: a clear path to profitability) to reduce their risk.
Series B
Sources of funding:
- Venture capitalists/corporate VC firms
- Family offices
- Late-stage venture capitalists
- Venture debt
- Revenue-based lenders
You reach Series B when your startup is ready to scale—launching manufacturing, marketing, and sales operations. This requires another round of funding, usually with a much larger capital injection from existing and new partners.
Key metrics for VCs and founders at this stage include: EBITDA, NRR, year-over-year growth, and new opportunities (verticals, markets, upsells).
While Series A was about proving your product’s potential, Series B is about showing real commercial viability. You’ll need to present performance metrics that prove you’re on a winning trajectory and demonstrate real market momentum (not just potential) to reassure investors about their returns.
At Series B, you’re likely working with VCs and inventors who specialize in scaling established startups to larger markets. Along with more funding, you can expect more hands-on guidance from inventors on how to compete and meet customer needs at a much bigger scale. Strategic investors may also make introductions and broker deals to help you seize new growth opportunities.
As a result, founders may have less direct control over the company’s direction at Series B, but they’re partnering with equity holders who have the experience—and the incentive—to drive similar products to success.
Series C (and beyond)
Sources of funding:
- Late-stage VCs/corporate VC firms
- Private equity firms
- Hedge funds
- Banks
- Family offices
- Venture debt
- Revenue-based lenders
At this stage, your original product has found its market fit and is generating profits, opening the door to growth through new products, new markets, or even acquisition. Typically, companies at this level have been operating for at least 2-3 years, showing steady profitability while still maintaining significant growth potential.
Companies here also need to be ready for global expansion. Because these businesses have a proven revenue stream and growth history, there’s less risk for investors, which means founders have access to a much larger pool of capital. That’s why hedge funds, investment banks, and private equity firms are more willing to invest at this stage—the returns are more predictable.
Mezzanine
Also called the “bridge” or “pre-public” stage, your company enters the Mezzanine phase once it’s firmly established and no longer a startup. You have a long-term, viable business plan, a seasoned leadership team, and plenty of options for the future—whether that’s an initial public offering (IPO) or a merger/acquisition.
In VC, ‘mezzanine financing’ usually refers to a late-stage funding round right before going public, but it can also mean any form of subordinated debt or preferred equity (which gets paid after senior debt). It often includes an equity component, like warrants or conversion rights, and carries higher interest rates than senior debt to reflect the added risk.
Mezzanine financing typically is part of the borrowed funds and sits between senior debt and equity in terms of payout priority. Because of its position in the capital stack, it can deliver significant returns if the company performs well.
At this point, early investors who helped fuel your growth can “cash out” by selling their shares and reaping the rewards of their investment. It can be a changing of the guard, as new late-stage investors step in, hoping to benefit from an IPO or sale.
Still, this is the stage where you can look back on your journey—from idea to profitability—as a true success (and you and your inventors can finally enjoy the rewards of your hard work).
Exit
Taking your company public through an IPO—offering shares on the open market—gives founders and early investors a chance to realize gains and raise additional capital. While launching an IPO involves significant work (including complex regulatory requirements and legal expertise), it’s essential at this Exit stage to have all your financial records in order and ready for audit.
A third party will review your financial statements to help determine the value of your public offering. While the audit focuses on your company’s future prospects, any past achievements—like successful R&D tax credit claims or grants—will strengthen your valuation.
At Boast AI, we’ve helped hundreds of startups across North America organize and optimize their R&D, while making it easier to access non-dilutive government funding. By giving teams a single platform to view their financial, technical, and product data holistically, businesses can better navigate any fundraising journey—VC or otherwise—and bring their innovations to market.
