Five Major Stages of Venture Capital Financing

Venture capital (VC) is a type of private equity. This form of financing is ideally meant for small, early-stage, emerging companies that have demonstrated high growth or are deemed to have high growth potential. Earlier, Anand Jayapalan had spoken about how VCs are willing to invest in such companies as they expect to receive a higher return on their investment in comparison to what they may get by investing in more established businesses. VCs generally invest in businesses that are in the early stages of their development, like when a company has just started or when it is developing a new product or service.

The major stages of venture capital financing are:

  • Stage 1: Pre-Seed Capital: This is the very first stage, where the initial funding is provided to launch a business and get it off the ground. There is a good chance that at this stage the startup founders are yet to release a product to the public due to being too busy trying to win over venture capitalists with a compelling pitch. The small amount of funds raised in the pre-seed stage tends to be used for market research and prototyping in most cases.
  • State 2: Startup Capital: Subsequent to the pre-seed stage, startup firms receive funding from venture capitalists. Businesses can start promoting and selling their products after properly researching the industry and creating a well-defined business strategy.  Most businesses are likely to have a working prototype of their product ready for the end users to try by this stage. The capital can be redirected to elevate the product/service, to hire more executives, and so on.
  • Stage 3: Early Stage: The money from this stage is generally used for running production facilities, increasing the marketing, and implementing sales processes.  The sum of money invested at this stage is quite worthwhile. As the company consistently promotes its goods, they may soon see a profit.
  • Stage 4: Expansion Stage: The real progress begins at the fourth stage. After a strong foundation has been set, additional funding can be put towards growing into other markets, developing new products, and even buying competing startups.  It is likely to take a fast growing company about 2-3 years to reach the expansion stage where a business is producing exponential growth and stable profits.
  • Stage 5: Mezzanine/Bridge: This is the very last phase of venture capital financing. It involves drifting toward a liquidity event like an acquisition. The financial needs of a business are likely to have grown to the point by this stage that they need help promoting important occasions. As a company reaches the mezzanine level, it is likely to have matured to the point where it can compete successfully in the marketplace.

Earlier, Anand Jayapalan had spoken about how when a company completes the stages underlined above and outgrows the money provided by venture capitalists, the next logical step is to go public. Doing so can be a good idea for any mature business or a promising new venture in order to attract new investors and give back to those who have supported them so far.