The first professional investor to a deal at the start-up stage is referred to as the Series A investor. This investment is followed by middle and later stage funding – the Series B, C, and D rounds. The final rounds include mezzanine, late stage and pre-IPO funding. A VC may specialize in provide just one of these series of funding, or may offer funding for all stages of the business life cycle. It’s important to know the preferences of the VC you’re approaching, and to clearly articulate what type of funding you’re seeking:
Seed Capital. If you’re just starting out and have no product or organized company yet, you would be seeking seed capital. Few VCs fund at this stage and the amount invested would probably be small. Investment capital may be used to create a sample product, fund market research, or cover administrative set-up costs.
Startup Capital. At this stage, your company would have a sample product available with at least one principal working full-time. Funding at this stage is also rare. It tends to cover recruitment of other key management, additional market research, and finalizing of the product or service for introduction to the marketplace.
Early Stage Capital. Two to three years into your venture, you’ve gotten your company off the ground, a management team is in place, and sales are increasing. At this stage, VC funding could help you increase sales to the break-even point, improve your productivity, or increase your company’s efficiency.
Expansion Capital. Your company is well established, and now you are looking to a VC to help take your business to the next level of growth. Funding at this stage may help you enter new markets or increase your marketing efforts. You should seek out VCs that specialize in later stage investing.
Late Stage Capital. At this stage, your company has achieved impressive sales and revenue and you have a second level of management in place. You may be looking for funds to increase capacity, ramp up marketing, or increase working capital.
Bridge Financing: You may also be looking for a partner to help you find a merger or acquisition opportunity, or attract public financing through a stock offering. There are VCs that focus on this end of the business spectrum, specializing in initial public offerings (IPOs), buyouts, or recapitalizations. If you are planning an IPO, a VC may also assist with mezzanine or bridge financing – short-term financing that allows you to pay for the costs associated with going public.
A key factor for the VC will be risk versus return. The earlier a VC invests, the greater are the inherent risks and the longer is the time period until the VC’s exit. It follows that the VC will expect a higher return for investing at this early stage, typically a 10 times multiple return in four to seven years. A later stage VC may be seeking a two to four times multiple return within two years.
FAQs
Venture capital (VC) is a form of private equity and a type of financing for startup companies and small businesses with long-term growth potential. Venture capital generally comes from investors, investment banks, and financial institutions.
What is venture capital answer? ›
Venture capital (VC) is a form of private equity and a type of financing for startup companies and small businesses with long-term growth potential. Venture capital generally comes from investors, investment banks, and financial institutions.
What are the methods of venture capital funding? ›
Venture capital financing can take the form of equity investments, conditional loans with royalty payments, or conventional loans with scheduled repayments and interest.
How many types of funding are there? ›
There are two types of funding that you can opt for when you do not have the cash to start your own business: equity financing and debt financing. Both of these types of funding are different in many aspects, but they both end in getting cash for the growth of your company.
What are the funds from venture capital? ›
What are Venture Capital Funds? Venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as very high-risk/high-return opportunities.
What are the different types of venture capital? ›
Types of Venture Capital
| # | Type |
|---|
| 1 | Seed funding |
| 2 | Start-up capital |
| 3 | First stage, first round or series A |
| 4 | Expansion funding |
2 more rowsExamples of Venture Capital
Series A, B, C, etc.: These are multiple rounds of funding that a company goes through, generally getting more substantial as the business grows. For instance, Facebook's Series A was $12.7 million from Accel Partners, while its Series B ballooned to $27.5 million from various investors.
What type of financing is venture capital funding? ›
Venture capital financing is a type of private equity investing specific to earlier-stage businesses that require capital. In return, the investor receives an equity stake in the business through the issuance of some type of security instrument.
How do startups get VC funding? ›
Venture capitalists rely heavily on trusted connections to vet deals. While some VCs will take pitches from an unsolicited source, it's best bet to find an introduction through a credible reference. Every pitch to a venture capital firm starts with an introduction to someone at the firm.
Which funding is best for startups? ›
Venture capital is funding that's invested in startups and small businesses that are usually high risk, but also have the potential for exponential growth. The goal of a venture capital investment is a very high return for the venture capital firm, usually in the form of an acquisition of the startup or an IPO.
5 Methods of Funding Your Startup
- Raising the capital necessary to establish and scale a startup is one of the many defining hurdles in the startup journey. Capital is the grease in the cogs that keep your startup moving. ...
- Bootstrapping. ...
- Equity Crowdfunding. ...
- Angel Investors. ...
- Accelerators. ...
- Venture Capital. ...
- Summing Up.
It's the minimum amount of money a founder is looking for from each angel who chooses to invest during their investment round. On the Obu platform, we show the minimum ticket size clearly next to all of our raises, so angels can feel confident about contacting founders for the first time.
How to find venture capital funding? ›
Check out a few popular VC associations below:
- National Venture Capital Association (NVCA)
- The Small Business Administration's (SBA) Small Business Investment Company (SBIC) Program.
- Find venture capital firms that invest in similar companies.
- Know your business valuation.
The stages of venture capital are the process that a company goes through in order to receive funding from venture capitalists. Each stage has a different level of risk and reward. The five main stages are pre-seed funding, startup capital, early stage, expansion and later stage.
How are venture capital funds structured? ›
VC firms are structured as limited partnerships, with two main categories of partners: general partners (GPs) and limited partners (LPs). The GPs are the partners who manage the fund and make the investment decisions, while the LPs are the investors who provide the capital for the fund.
What is the simple definition of venture capital? ›
Venture capital (VC) is a form of investment for early-stage, innovative businesses with strong growth potential. Venture capital provides finance and operational expertise for entrepreneurs and start-up companies, typically, although not exclusively, in technology-based sectors such as ICT, life sciences or fintech.
How do you answer the question why venture capital? ›
Example answer: “I've been wanting to work for a venture capital firm for a long time, mainly because I'm very interested in observing young companies. I enjoy discovering how each company plans to scale and evolve and then assessing how they put their plans into practice.
What is venture capital in one sentence? ›
Venture capital is money that is invested in projects that have a high risk of failure, but that will bring large profits if they are successful.
What is venture capital for dummies? ›
Venture capitalists are the professional investors who give start-up companies money in exchange for equity in the company. They provide both liquid capital and support for a company during a fundamental time in the growth of the business.
The first professional investor to a deal at the start-up stage is referred to as the Series A investor. This investment is followed by middle and later stage funding – the Series B, C, and D rounds. The final rounds include mezzanine, late stage and pre-IPO funding. A VC may specialize in provide just one of these series of funding, or may offer funding for all stages of the business life cycle. It’s important to know the preferences of the VC you’re approaching, and to clearly articulate what type of funding you’re seeking: