Generating capital through partnering with a Venture Capital Fund is one of the commonly used options to generate funds for small and growing businesses… In this article, we unpack the 5 stages of venture capital. Knowing the stages and the expectations and purpose of each stage will help you better understand what is available to you as a business owner.
Stage 1
pre-seed
This is the initial funding a business receives. This is usually in the form of family, friends or personal funds put into the business. At this stage, the business is still very conceptual with little structure. The business owner is spending time researching the market, networking and building a pitch and business concept.
Funders:
- Family and friends / personal funds
- Early Stage Accelerators
- Micro VCs / Early Stage VCs
Stage 2
seed
Seed funding is used to take the concept in pre-seed and start building an early-stage product. Most of the time spent here will be in R&D to get a working prototype or minimum viable product and a better understanding of the market needs for the product. Funds will be used to hire people who can build the product. Most other business functions will either be “winged” by the business owner or outsourced.
Funders:
- Family and friends / personal funds
- Early Stage VCs
- Early Stage Accelerators
- Angel investors
Stage 3
Early Stage Capital
This is usually referred to as series A and B raises:
Series A:
Here funds are used to get production up and running and the product into the market. The focus will usually be on product development, production, marketing and sales and generating turnover. The team expands with a focus on the above functions and necessary support roles.
Funders:
- VCs
- Accelerators
- Wealthy angel investors
Series B:
Here funds are used to scale and capture market share. In this stage, a lot of time and funds are spent on market feedback and product enhancement, marketing and sales, optimising workflows and hiring for support business functions.
Funders:
- VCs
- Late stage VCs
Stage 4
Late Stage Capital
This is usually referred to as series C and onward.
This stage is primarily focused on establishing a strong customer base, robust presence in the market, healthy financials and market expansion. New sales channels and products may be developed in this stage to increase market size or capture more of the existing market.
In this stage, existing investors can be looking to exit to late-stage funders.
Funders:
- Late stage VCs
- Private equity firms
- Hedge funds
Stage 5
Before IPO
Also known as the Mezzanine stage.
Here funds are used for major expansion and getting ready to exit through an IPO.
Funders:
- Private equity firms
- Hedge funds
All funders in the above stages have a different investment time horizon into your business and may look to exit their investment when your business reaches a certain maturity and will offload to later-stage investors at a certain multiple of their investment. Alternatively, investors may push for dividends for return on investment.
The return on investment that a funder is seeking can vary due to several factors, including variables unique to the business that is trying to raise funds, but both the time horizon of investment and the stage of funding do play a part. As an industry norm series A and early-stage investors due to the risk will look for a 10x return on their investment over a longer period of usually 5 – 7 years, while late-stage investors will look for a return of 3x to 5x due to lower risk over a similar or shorter time frame.
Venture Capitalists will often focus on investing in certain industries and usually have a preference for product or technology-based businesses where a sellable IP or production base is being generated, over more traditional consulting and service-based businesses.
Feel free to reach out to me and I’ll happily answer any questions you may have.
