Question

Venture Capital Financing is a type of funding which assemblies cash from investors and lend it to startup businesses that have high potential for success. Venture capital investments usually emcompass very high risks; however, the reward has the potential to exceed the risk. The process of acquiring venture capital financing sometimes is complicated, but generally there are five stages in the process of procuring venture capital financing.

1. Discuss the five main stages in the process of Venture Capital financing.

Answer 1

The following the five stages of venture capital financing as follows:

Seed capital :

It is the first stage of VC to create road map for the startup’s. Under this stage the leader’s of the statup may not have any commercially available product and more over they are focused on convincing investors why their ideas are worthy of VC support.

Seed funding rounds are primarly focused towards research and development of initial product. The money may also be used for conducting research and expanding the team. There are many seed accelerators available who will accept applicants to provide seed capital and offer an opportunity to demo a solution to major investors.

Startup capital:

This stage is quit similar to the seed stage. Here initial market analysis and business plans are made. They will start marketing & advertising the product to acquire the customer. At this stage organization will be having a sample product with them. VC funding may be diverted for acquiring more management people, fine-tuning the product or conducting additional research on it.

Early stage capital:

This stage usually comes after completing seed stage and startup stage. At this stage the funding received by the organization will often go towards manufacturing and production facilities, sales and marketing. The amount invested under this stage will be very high as it was spent on capital expenditure. At this point, the company may also be moving toward profitability as it pushes its products and advertisements to a wider audience.

Expansion stage:

Growth of the product will be taken place at this stage. The VC funding will be available in this stage will be used for expansion to additional markets, diversification of the product, and differentiation of the product lines. After the product is commercially available in the market, the organization will start getting revenues. Many companies will be in the business for two or three years after expanding the business.

Mezzanine stage:

After completing the above stages, the company may be looking to go public once their products and services have taken suitable traction. Funds received under this stage will be used for the activities below.

• Mergers and acquisitions
• Price reductions/other measures to take out competitors
• Financing for initial public offering

If everything went as planned, the investors may sell their shares and end their engagement with the company, having made a healthy return. Many tech IPOs like Facebook, Twitter and Yelp were only possible after years of VC funding that fueled user and revenue growth.