Venture Capital Financing

Important Stages of Venture Capital Financing

by admin

Venture capital (VC) is a form of private equity. It is an increasingly popular type of financing that is provided to small, early-stage, emerging companies that are deemed to have high growth potential, or have demonstrated high growth. In the past, Anand Jayapalan has spoken about how VCs are inclined to invest in such businesses as they expect to enjoy a higher return on their investment than they would from investing in a more established company.  

Here are some of the key stages of venture capital financing:

  • The seed stage: Venture capital financing starts off with the seed stage when the firm is just a bit more than an idea for a service or product that has the potential to develop into a successful venture down the line. At this stage, entrepreneurs try to convince investors that their ideas do represent a viable investment opportunity. At the seed stage, the funding amounts are generally small. This funding is primarily used for things like product development, marketing research and business expansion. The seed stage financing can help in the creation of a prototype to attract additional investors in later funding rounds.
  • The startup stage: At this stage, startups would have ideally completed their research and development, as well as devised a business plan, and would be ready to get started with their advertising and marketing. They have a prototype to show investors, but have not yet sold any products. At the startup stage, businesses would require a large infusion of cash in order to effectively fine tune their products and services and expand their staff. They may also need funds to conduct any remaining research required to support an official business launch.
  • The first stage: Also known as the “emerging stage,” this stage tends to coincide with the market launch of the company, when the business is finally starting to see profits. Funds from this VC financing phase generally go towards product manufacturing and sales, and might also be spent on increased marketing. Businesses need a large capital investment in order to achieve an official launch. Hence, the funding amount at this stage is ideally higher than the previous stages.
  • The expansion stage: This is the stage where company experiences considerable growth, and requires additional funding in order to keep up with the demands. Finding at this stage is meant to grow the business further, as the company is likely to already have a commercially viable product and is starting to see profitability. Funds from this stage can be used for market expansion and product diversification.
  • The bridge stage: Funding at this stage is commonly acquired to support activities like IPOs, mergers or acquisitions. The bridge stage implies to the transition of an emerging business to a full-fledged, established company. Many investors opt to sell their shares at this stage, while enjoying a significant return on their investments.

Previously, Anand Jayapalan had discussed about how going public is the next logical step for a company that has outgrown the original money provided by venture capitalists. Taking a private firm public involves selling shares of stock to the general public, and can be a good way for mature businesses to attract new investors.

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