Why do Startups raise investments round after round? Demystifying Continuous Funding and the Onion Theory of Investment Risk
Startups raise multiple funding rounds to address layered risks, starting with founder funding for initial challenges. Each round tackles specific risks, leading to greater stability and success in fundraising.
Why do Startups raise investments round after round? Demystifying Continuous Funding and the Onion Theory of Investment Risk
Every day, we see investment announcements ranging from Pre-Seed to Series A, B, C, and beyond.
But have you ever wondered why startups need to raise multiple rounds or how investors make their investment decisions? If not, here's our insight gained from years of experience in both raising funds and investing.
Think of a new startup as having multiple layers of risk, similar to an onion. Initially, the founding team faces various challenges, from team formation to building the right MVP (Minimum Viable Product). Through multiple A/B tests, a startup might succeed in forming a team of 2-3 founders and build an MVP using their own capital. At this point, they've "peeled away" two layers of risk using their own money: team risk and initial product risk.
The startup may then raise money to address the next 2-3 layers of risk. With this progress, the next funding round helps tackle additional challenges like market risk and distribution risk. Each investment round should be properly utilized to peel away specific risks, helping the startup to become more stable.
If your pitch and progress align with this principle no investor will say no or may be to invest. Remember, raising money is not to buy time, just to peel the risk and to build more stable company
