Venture capital firms (VCs) are private equity investors. These firms invest in small businesses in the health and technology sectors. The reasons are the inability of these startups to get funding from traditional sources. In providing these funds, VCs do it in stages. Below are four stages of funding small businesses.
Stages of VCs funding
Seed or startup stage fundings: Also called the pre-marketing stage. Under this stage, the entrepreneur or inventor has conceived an idea and he or she is able to convince a VC firm or an Angel investor that his or her idea, worth their money.
The VC firm will provide a small fund to the startup to carry out market research, product development, building a management team and business plan. If the inventor is successful, more funds will come in through the next round of funding.
Early-stage funding: Fundings in this stage are for startups that their products are almost ready for commercial use. In most cases, the product might be in the testing stage or partially available for sale to the public.
Most VCs financing begins in this stage. When a small company receives this finance, it is mostly used to make its product available for use by consumers. Here, the startups can utilise the networking capacity of the venture capital to connect with potential buyers, implore the services of brilliant individuals and scale their product.
Expansion or Mid-stage funding: Under this stage, the startup product is available for sale. In addition to providing funds, the VC firm supports the entity with strategic plans.
The funds provided at this stage is to meet the working capital needs of the small business and help it expand. And many startups used the fund to expand to other regions or countries.
Later stage: This is the fourth or final stage of VCs financing. This financing is for startups that are not expanding as fast as during the expansion stage. Also, the company will be in a good cash flow position. However, it may or may not be making a profit at this stage.
In the later stage, VCs financing will aid the maintenance of the company’s cash flow. Also, a few years after the findings, the startup should be considering an Initial Public Offering (IPO), a merger or an acquisition.
Venture capital financing goes through several stages. From ideation of the product to when the business has break-even. But, the stages should never be confused with financing rounds which are usually in Series.