Entrepreneurs and business experts have defined venture capital as a financing style between a capitalist and entrepreneur with a common goal of a handsome return in a short period of time, maybe 3 to 5 years. But while there are several resources on the definition and characteristics of this topic, few have actually discussed the options that this kind of business set-up has.
Before taking the plunge, know what these options are and how they can be applied to your current business plan.
The funding option depends on the stage of the company’s progress. Investment firms can invest from $50,000 up to $20 Million. If the company is still at its earliest stage, where a concept or invention is still to be developed or proved, the option is called seed financing. Here investment is spent on marketing and product development. Product ingenuity and market research are the areas being focused.
When the company has already developed its product and marketing strategy but needs money for the actual production and initial marketing, the funding option is called start-up financing. This is the common option for new entrepreneurs and inventors. Here funds are spent for the production and initial marketing. Amounts can range from $50,000 to $1 Million.
Sometimes a company already has its products and may have initially introduced them to the market, but receives little or no revenue at all. In this case, the entrepreneur may need financial assistance at this stage, called the first or early stage. The amount usually ranges from $500,000 up to $15 Million, depending on the extent of the changes that need to be made. It could be that the product needs to be revised or developed to make it more saleable, or it can be a mere repackaging or change in advertising strategy.
The next option is called the second or later stage. Here the company has its products and may have received revenues, and has the potential of making it big in the near future, but for some reason has no funds at hand. It could be that there are some loans that need to be paid, or other financial schemes that need to be complied with. That is why venture capital firms invest from $2-15 Million to help the company.
Some profitable companies want to expand, but does not want to put in more capital out of their own money. Their goal is not to keep the company for many years but for it to quickly grow in order to make an IPO within a few months, say 3-18 months. This option is called the third or mezzanine stage. Amounts range from $2 Million to $20 Million.
Similarly, this next option needs an investment before an IPO, but the time frame is within 3-12 months. This is called the bridge. Investment is also between $2 Million to $20 Million.
Remember that there is a specific option for each stage that your company has. The key is to know what options to use. Similarly, you must know where to find these venture capital firms. You must also develop a concise but comprehensive business proposal to present to them. Lastly, keep in mind that venture capital is not the end-all but just the beginning of more challenging things to come.