Venture capital (VC) is a type of private equity. It is a type of financing that is provided to small, early-stage, emerging companies that are considered to have high growth potential. Earlier, Anand Jayapalan had underlined that these companies typically also demonstrate high growth in terms of annual revenue, number of employees or both. The financing pattern of venture capital generally follows through a series of funding rounds.
Here are the major stages of venture capital financing:
- Stage 1: Pre-Seed Capital-The very first stage of venture capital is commonly referred to as pre-seed capital, as it provides the initial funding needed for launching a business and getting it off the ground. It is possible that at this stage the leaders of the startup have yet to release a product to the public as they are focusing on winning over venture capitalists with a compelling pitch. The funds raised in the pre-seed stage are usually used for prototyping and market research.
- Stage 2: Startup Capital- Subsequent to researching the industry and developing a robust business strategy, it will be time to start promoting and selling the products. The majority of businesses will have a working prototype of their product ready for consumers to try at this stage. This capital can be redirected for hiring more executives, elevating the service/product or undertaking more studies.
- Stage 3: Early Stage (Second Stage Capital)- This stage generally takes place after the pre-seed and startup stages, even if its name may sound contradictory. Money from this stage is largely used for production facilities, manufacturing, sales and increased marketing. The sum of money invested at this stage is generally more significant than in the previous stages. As a company continues to promote its goods and marketing, it might start to turn a profit soon.
- Stage 4: Expansion Stage (Third Stage Capital) – Real progress starts at the fourth stage of venture capital. Most businesses will have a strong foundation by this stage, and will be producing stable profits. Hence, additional funding can be used for developing new products, growing into other markets, as well as purchasing competing startups. Fast-growing companies are likely to take a couple of years to reach the expansion stage. To secure stage four funding, a company needs to have a solid customer base and a proven track record.
- Stage 5: Later Stage – Mezzanine/Bridge- The very last phase of venture capital involves steering toward a liquidity event. This can be an IPO (Initial Public Offering) or an acquisition. When a company reaches the mezzanine level, it is likely to have matured to the point where it can compete in the marketplace successfully. This is the final stage of venture capital financing, where many investors tend to sell their stock to cash in on their substantial gains. After the initial investors have left, later-stage investors may go in with the expectation of profiting from an initial public offering or selling the company.
Earlier, Anand Jayapalan had mentioned that as portfolio companies grow and evolve, they tend to pass through different stages in the VC funding process. While certain venture capital funds specialize in particular stages, many others may consider investing at any of the phases.
