Some Basic Facts Regarding VC Funding (Part II)

In the first part of this article we had covered a few points related to Venture Capitalists and their area of focus while investing on business ventures. In this segment, which is the second part of the article, we will be focusing on the different stages funding provided by Venture Capitalists.

The funding provided by VCs varies across different stages of the growth of the firms that it is investing in.

The stages are as follows:

Pre Seed Stage: As the name suggests this is the first stage of funding and can also be taken as a token amount provided as capital to kick start and market a potential idea that has good future prospects. This also covers the development work of the product to some extent.

Seed Stage: The actual and full time involvement of Venture Capitalists in the business starts from this stage that is the Seed stage. This is the stage when financing is provided to complete the development of the product and commence the formalities of marketing.

Early Stage or the First Stage: In this stage companies are provided with financing for initiating commercial manufacturing and sales of the product.

Second Stage: This is the stage where growth and expansion of the business starts in terms of growth in accounts receivable and inventory. Financing is provided to companies to focus on those areas for growth.

Third Stage: By the time the third stage comes the companies have already reached the state of break even point. That means the company has come to the stage where the total revenue equals its total cost or expenses. Funding at this stage is provided with the sole intention of major expansion and increase in sales volume.

Later Stage Financing or the Bridge/Mezzanine financing: This stage of financing is usually done before the company goes IPO (Initial Public Offer). This is the time when the company plans to go public. It is structured in a way that it can be repaid in the form of proceeds received from the public offerings.

Now that we have gone through the different stages of financing we will try to understand the key elements that venture capitalists study before financing an organization. We will be covering this topic in our next segment.