When it comes to establishing start-ups, there are several ways for entrepreneurs to get funding. With technology and innovation being at the forefront of the business world today, it is no surprise that the amount being put into start-ups has been growing over time. As a result, venture capital has become an increasingly important source of funding for aspiring business owners. It is particularly common for start-ups with bright and creative ideas and massive potential in the market.
Venture capital funding, abbreviated as VC, involves collecting cash from investors and lends it to start-ups that have significant growth potential. The early stage VC funds can be useful in kickstarting your production, sales and marketing. That said, the idea of VC funding is slightly more complex than it sounds and typically pans out in five stages. Learn more about each of the stages briefly to get a better understanding of this funding source.
The seed stage begins when a startup pitches their idea to an angel investor or venture capitalist. At this point, their product or service will not yet be available commercially, so the goal is to convince investors of their idea’s potential. The investor will then examine aspects of the idea and determine its feasibility and profitability. Seed funding rounds are typically smaller than in other stages, but lately, there has been a trend of increasing seed rounds.
In this stage, a company may have a sample product available, but not enough funding to proceed with development. The funding acquired in this stage will also be used for further research and development to determine the market feasibility. Here, the venture capital firm will be interested in seeing market research results to set realistic expectations. With this, investors have a better idea of how much funding is required to proceed with the next stage.
At this point, the product or service is being sold in the market, so early stage VC funds will go towards further production and additional marketing. Investors will be monitoring how your business fares to see how the market responds to it. The funding in this stage may be higher than in others as investors are starting to think about profitability. If the venture capital firm finds that your products and services are performing well, they will likely proceed to the following stage of VC funding.
As you develop your product and conduct continuous research, your business starts to grow exponentially. Thus, once you reach the expansion stage, the funding collected will be used to scale your business and grow your market share. Depending on how your company fares, you may start to look at strategies like product diversification, market expansion, and others to grow your sales. Once you reach this stage, it is expected that your business is collecting considerable profits.
The final stage is the mezzanine, also known as the bridge or pre-IPO stage. As the name suggests, the goal of funding at this point is to get a company to go public, so the investors can exit the venture successfully. As such, the funds accumulated in this stage can be used for mergers or acquisitions, additional strategies to maintain competitiveness, or financing decisions needed to declare an initial public offering (IPO).