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Venture Capital Financing

To start an own company or to bring a new product to the market, you will have to attract financial funding. There are several categories of financing possibilities. If you are a small company, then perhaps you can rely on family funding, loans from friends and personal bank loans. For bigger ambition, some people needs more then that, some people have access to recourse who known as Angel Investor. Those are private investors who are using their own capital to finance your need. However there are also venture capital firms (VC-firms) who are specialised in financing new ventures. When you approach the last one, you are going to do more than negotiating about the financial terms. These investors offer more than financial needs; they also provide the necessary expertise such as legal or marketing knowledge. This is also known as SmartMoney.

Venture Capital Financing Process

As you have read in the previous chapter, there are several ways to attract funding. However we are going to look deeper into the financing process by venture capital firms. The process consists of five stages;

Seed stage;
Start-up stage;
Second stage;
Third stage;
Bridge/Prepublic stage.

Seed Stage

This is the first stage where it all starts. This stage is considered as setup stage where a person or a group of people approach the VC-firm for funding for their idea. During this stage the firm will investigate into the technical and the economical feasibility of the idea (Feasibility Research). In some cases, there is a sort of prototype that is not fully developed or tested. If at this stage, the idea is not feasible. The VC-firm will not consider financing the idea.

Start-up Stage

If the idea is qualified for further investigation or investment, the process will go to the second stage, which is also called the start-up stage. At this point many things are happening. A business plan is being produced. A management team is being formed to setting up the venture. A prototype is being developed and fully tested. In some cases, initial sales are being made with clients. The team will establish a feasible production line to produce their product. The VC-firm is monitoring the feasibility of the product and the capability of the team. If everything goes well, the market is size is big enough and the funding for the next stage is reasonable, the VC- firm will go for the next step. If at this stage, the VC-firm is not satisfied about the progress. The firm will stop their funding and the venture will have to search for another investor(s).

Second Stage

At this stage, the idea/product is being produced and sold to client. The venture is trying to gain some market share. They also try to minimize their losses or to reach the break-even. This stage is also seen as the first encounter with other competitors. The VC-firm monitors the management capability of the team. How they manage the development process of the product and reaction against the competition. If at this stage the management team is proven their capability of standing hold against the competition. The VC-firm will consider going for the next stage. However if the management team lacks in managing the company or doing badly against the competitors. The VC-firm may suggest for restructuring of the management team or bill themselves out by cutting their funding.

Third Stage

This stage is seen as the expansion/maturity phase of the previous stage. The venture will try to expend their market share. By selling more product and having a good marketing campaign. Also, the venture will have to see whether it is possible to cut down their production cost to gain more advantage against the competition. This stage is considered as the growth stage of the venture. At this stage the VC-firm is monitoring the objectives mentioned in the second stage.

Bridge/Prepublic Stagge

At this stage the venture is still concentrate at expanding and is trying to achieve an exit vehicle for investors. This stage could also be to achieve a “turnaround” or salvage of troubled investors. Most of the time, there will be additional continuation stage involved between the fourth and the Bridge/prepublic stage. Because the venture fails to achieve some of the important benchmarks most of the time. At this point the investor usually ends its investment. However there are limited circumstances known where investors made a very successful initial market impact might be able to move from the third stage directly to the exit stage (Exit Strategy).