Venture Funding Phases
The Stages of Venture Funding
Pre-seed is the earliest form of funding. In this stage an entrepreneur starts evolving its business idea conducting initial tests not including marketing activities yet. Usually, this stage makes part of the seed stage. However a trend is emerging, attracting investments up to US$ 500.000 already in this early stage. Thus, the pre-seed stage can be viewed as the new seed stage. Capital for the pre-seed stage comes from personal savings of the founders, family, friends and fools (FFF) or strategic investors raising capital for pre-seed funds.
The seed stage represents the initial capital necessary to start a company and to find a product-market fit (Novoa J.). In this phase product development, patent filings, market surveys and research and business partner recruitment takes place. The emphasis is on examining the business idea feasibility and getting the firm ready to start operations (Newton 2001). Capital for the seed phase may come from personal savings, personal retirement account/pension/life insurance borrowings or from external sources like FFF, university and private incubator programs, foundation grants, economic development agencies and Angel investors. Capital invested in the seed stage amounts to US$ 25.000- US$ 500.000.
The next financing stage comes when the venture is ready to launch. At this stage the firm has usually figured out the product and the size of the market and needs capital to scale to scale the elements of its business model. The firm is making its first revenues, however the expenditures are still exceeding. This stage is also known as startup financing or as series A round of investment. If the business proves viability it might need a second round of financing to build infrastructure, further develop the marketing plan, hire employees, and establish strategic alliances in the market. This round is labeled series B and might be followed by series C and so forth. Capital for the early-stage is usually provided by Angel investors, venture capitalists, and in some cases, strategic partners, customers and government agencies. Series A round typically ranges from US$ 1 million to 5 million. Series B rounds from US$ 6 million to 10 million.
When companies arrive at this stage they have a working business model, a customer base and operations running. The firm may or may not be profitable. Financing rounds at these stages tend to range from US$ 10 to hundreds of millions of US$. This stage may encompass a series C round provided by the investors listed in the early stage, or may involve a new category of investors such as merchant banks, investment bankers, private equity funds, institutional international investors or commercial banks that are able to invest a large amount of capital. This capital raised in this latter stage is called mezzanine or bridge capital and is used to support continued growth opportunities while preparing for an acquisition, a management buyout, a leveraged buyout or an IPO.
Initial Public Offering (IPO)
Especially for growing capital intensive businesses it is challenging to raise enough capital to cover its investments. An IPO is an opportunity for a firm to raise a large amount of capital by issuing shares to the public. An IPO is considered as a possible exit strategy for former investors that are aiming to be rewarded for their investments. The underwriting process is typically carried out by an investment bank that conducts a deep business valuation, structures the corporation and defines the amount and the price of the shares offered to the public. Further, the underwriter takes on a marketing role and assisting the company to place the shares.
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