Venture capital plays an important role in enabling small businesses and startups to get funds as they do not have access to capital markets. Venture capital funding has become popular as it offers above-average returns to investors during times of success. Earlier, Anand Jayapalan had spoken about how a large number of venture capitalists are wealthy investors with the required expertise and finance. Other sources of VC funds are corporations, pension funds, banks, and financial institutions.
As each and every company is different, the varied stages of venture capital financing can vary to an extent. However, on the whole, there are five typical stages of any venture capital financing. These stages are:
- The Seed Stage: Venture capital financing starts with the seed stage. At this stage, a business ideally is just a little more than an idea for a service or product that has the potential to develop into a successful venture down the road. Entrepreneurs usually spend the majority of this stage trying to convince investors that their ideas represent a pretty viable investment opportunity. Funding amounts in the seed stage are usually small, and are most commonly used for things like product development, business expansion, and marketing research. Business owners often use these funds to create a prototype for attracting additional investors in later funding rounds.
- The Startup Stage: Companies generally have completed research and development by the startup stage. They would also have devised a business plan, and gear up to start advertising and marketing their product or service to potential customers. Generally, at this stage, a business has a prototype to show investors, but hasn’t yet sold off any products. Businesses require a larger infusion of cash to fine-tune their products and services at this stage, expand their personnel and conduct any remaining research required to support an official business launch.
- The First Stage: At times also known as the “emerging stage”, this is the very first stage of financing. It generally coincides with the market launch of a business, and when the company is finally about to see a profit. Funds from this phase of a venture capital financing usually go to the actual product manufacturing and sales, as well as improved marketing. Businesses ideally need a much bigger capital investment to get to an official launch. Therefore, the funding amount at this stage is usually higher than in previous stages.
- The Expansion Stage: At this stage, companies experience exponential growth and require funds to keep up with the demands. Venture capital funding at this stage is commonly used for growing the business further with the help of market expansion and product diversification strategies.
- The Bridge Stage: This is the final stage of venture capital financing, and is meant for when companies have reached maturity. Funds acquired during this stage are generally used for supporting activities like IPOs, acquisitions, and mergers. The bridge stage involves the transition from a startup to a full-fledged, viable business.
Earlier, Anand Jayapalan had discussed how business owners can seek the assistance of experts who can guide them through the different stages of venture capital financing and provide advice on the best ways to secure funding for the company as per its current stage.