Accounting & Finance

Late-stage startups are gaining clout, shrinking the power of investors

  • 3 min Read
  • August 13, 2021

Author

Escalon

Table of Contents

Mature startups are starting to take their power back. Rather than relying on a lead investor to help secure funding, often forcing the entrepreneur to hand over some level of control over their own company, an increasing number of startups are setting their own valuation and hosting their own fundraising rounds. Is this power reversal movement set to become a long-term trend?

Background

Late-stage startups, also called Series C, are companies that have been successfully in business for a few years or more. Companies at this level are already on their way to profitability, their market has taken notice of them, and they just need an extra round or two of funding to keep scaling up quickly. These companies tend to have a fairly stable business model which helps them attract the funding they need.

For companies like these, conventional entrepreneurial advice says to find a lead investor as soon as possible during the startup phase of a company. This key leader, and largest capital investor, is critical to give the startup validation and to attract further investment. In fact, many lower-level investors will not consider seeding a startup until the startup has a significant lead investor backing it. However, having a lead investor is not a requirement for funding. And a growing number of late-stage startups are taking advantage of this freedom to run their startup their own way.

The potentially controlling role of the lead investor

Besides rallying other investors, the lead investor also sets the term sheet and the post-money valuation for the startup. In other words, they decide what benefit investors get for seeding the startup, and they decide what the startup is worth before and after each round of fundraising (the valuation). The lead investor may also require a seat on the board of directors and power to advise the startup’s decisions and purchases. This influence can greatly impact the direction the company is going. So, with this great infusion of capital comes a loss of control for the entrepreneur.

Until recently, fundraising without a lead investor was nearly impossible. Smaller investors demanded the social proof and validation that came from having a prominent lead investor. Knowing a successful investor has already deeply vetted the company was the main selling point for startups hoping to secure future rounds of capital.

Startups looking to fundraise without a lead investor can seek independent valuation for their business. Common first steps include working with a CPA, a business adviser and a real estate agent if the startup includes property. This ensures an accurate valuation that isn’t skewed by the entrepreneur’s optimistic bias about their business. 

A slow-but-notable shift in power

While fundraising without a lead investor is far from commonplace now, an increasing number of late-stage startups are opting for the independence to maintain full control of their business. For many young companies, the loss of power to operate their startup the way they choose is not worth the inflow of funding. With fewer late-stage startups heading into Series C funding with a lead investor, smaller investors are being forced to consider seeding these independent companies in a new way.

As more startups pursue their own paths to growth, it’s likely we will see a broader acceptance of independent fundraising. And with the boom in crowdfunding activity, it’s easier than ever to find small investors willing to seed the next big startup.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Accounting & Finance

The Role of Financial Reporting in Small Business Growth

Financial reporting often appears to be a routine exercise, but for small businesses, it can be the difference between reactive...

Read More
Accounting & Finance

The Impact of Accurate Financial Operations on Business Success

Financial operations encompass the systems and processes that govern every monetary aspect of a business—from managing payables and receivables to...

Read More
People Management & HR

The Benefits of Outsourcing Payroll for Small Businesses 

For many small business owners, running payroll is a time-intensive chore that requires meticulous calculation, familiarity with tax codes, and...

Read More
Accounting

Introducing C3: Your All-in-One Financial Management Platform

Managing your business’s finances can often feel like juggling too many tasks at once, especially when you’re trying to keep...

Read More
Accounting & Finance

Tax Planning Strategies to Maximize Small Business Savings

Small business owners often grapple with tax obligations that can swallow a large portion of their profits if not managed...

Read More
People Management & HR

Streamlining HR Processes, Best Practices for Small Business Owners 

Human Resources (HR) might feel like an afterthought for many small business owners juggling day-to-day demands, yet it has a...

Read More
People Management & HR

Leveraging AI for Efficient People Operations

Artificial intelligence (AI) isn’t just for tech giants anymore—it’s increasingly accessible to small and mid-sized businesses seeking a competitive edge...

Read More
Accounting & Finance

How to Set Up Payroll, A Guide for Small Business Owners 

Setting up a payroll system is an essential step that helps small business owners pay their employees accurately and on...

Read More
Accounting & Finance

Financial Planning for the Future, Setting Long-Term Business Goals

While small businesses must handle day-to-day tasks—like managing payroll or closing monthly books—long-term planning is the compass that keeps them...

Read More