According to a report from Ernst & Young, the investment levels in the global venture capital (VC) industry reached US$ 48.5 billion in 2013. Whether this is a blessing from above or fruit of hard work and determination by the business founders, thanks to venture capital funding. Entrepreneurs spending their talent, skills, time and management expertise now have venture capital firms to back them on their business undertakings.
As a form of business financing, venture capital funding is usually provided by VC firms to young and high-growth startups and small businesses that are mostly inclined with the latest trends in technology. There are at least five stages involved in venture capital financing. These are: 1) seed stage, 2) startup or early stage, 3) second or formative stage, 4) third or later stage, and 5) balanced or pre-public stage. On these stages, “seed rounds” are being conducted. They are series of events where venture capitalists (VCs) invest certain amount of venture capital to the company in accordance with certain valuation criteria. Generally speaking, the seed rounds also refer to funding milestones offered by VC firms to the company founders.
Here’s how each stage works.
In the Seed Stage, it is assumed that the private company is seeking for modest amount of capital to fund its start-up operation. For high-growth businesses, this capital is in the range of $ 250,000 to $ 1 million. This venture capital is used to finance the company’s product development, market research and forming of a management team.
In the Startup Stage, VCs outlay another venture capital funding to support the initial commercial manufacturing and sales activities of the business. The company at this stage is already generating revenue but not that much of a profit. This is the stage where “Series A financing” happens. Interested VC firms will conduct another valuation of the company to determine the actual amount of venture capital needed. In this seed funding round, investors are already purchasing ownership stake in the company.
During the Second Stage, the company already has a say to its competitors. Meaning, it is already holding a significant market share. Various sources of revenue are well-formed. The management team is also being closely monitored by the VCs against their capability to put the company ahead of the competition. “Series B financing” happens in this stage where venture capitalists launch bigger investments compared to Series A.
On the Third Stage, profitability is on top of every VC’s mind and they are eager to strictly evaluate the company’s financial performance on a regular, short-interval basis. At this point, the company is said to have reached its maturity phase and therefore is ready to initiate its expansion plans. VC firms, on the other hand, is said to have already mitigated their investment risks. This is considering that the company is making revenue enough to sustain its full operation. However, there is still a need to raise additional venture capital funding in order to carry out all those expansion programs. This is when “Series C financing” occurs.
The Pre-public Stage is the point in time when the company is said to be in perfect harmony and balance. Revenue is good. Profit is realized. Its current market share is already posing threats to competitors. At this stage, VCs are all set to position the company for the public listing process.
The entire venture capital funding stages can span from 3 to 7 years prior reaching Initial Public Offering (IPO). The total amount of venture capital funding that can be raised through seed rounds can range from $ 10 million up to $ 1 billion (or even higher). From seed stage to pre-public stage, the venture capital firm and the company being funded are actively playing their roles in bringing the company to the height of success. They are aiming for higher Return on Investments (ROI) and bigger profits.