January 26, 2022


Accounting + Finance Blog

Multi-Stage Fund meaning and key Explanations

Multi-Stage Fund meaning and key Explanations

I have previously discussed early and late state funding for venture capital. In multi-stage fund, the VC firm is involved in the aforementioned two stages. It provides seed financing and also supports the startups as they work their way into a bigger company. In the end, the intermediary does exit by either an IPO or outright sale.

Definition of Multi-stage Fund

1. A multi-stage fund is a type of venture capital financing in which the intermediary provides both early and late-stage funding to companies.
2. It can also be defined as when a VC provides finance for private equity companies that are either in prototype (incubation) period or have gained good market share.

Key Explanations

Combined financing. Here, the VC firm provides fundings not only for early-stage private equity companies but those that have gained huge market share. The intermediary may invest in an entry from its early times to when it is in its growth stage. It may also invest in different companies at various stages. A ratio of its resources may be pulled to each stage. For example, the VC firm may invest in company A that’s at its seed stage. And also invest in growth-stage company B.

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Incubation period. It is the ideation stage of a private equity firm. In this stage, the entrepreneur conceives an idea and needs finances to support the research of this idea into a product. There are VCs that specialize in this known as incubators. However, multistage venture capital firms do not only invest in incubation or prototype stage firms.

Growth Entity. Private equity firms that have passed the incubation stage are growth entities. Here, its products have passed the introduction stage of a product life cycle. This means that it has gained a good market share and therefore does not need working capital to keep the business afloat. But it needs cash to expand to other regions.

Diversification. A reason why many VC firms may practice multi-stage funding may be to diversify risk. This investment type is very risky stuff. To mitigate the risk, investing in the different stages of a company is appropriate. It will serve as a shock absorber in case one investment fails.

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For example, a venture capital firm may invest in company A (early stage) and company B (late-stage). If company A does not become successful and is shut down, then the investment in company B will save the VC. This will be better than if the entity had only invested in company A.


Finally, multi-stage financing VCs invest in both new and growing private equity companies. Such firms may invest in an incubation stage and support the company to its growth and of course, find a suitable exit channel. The goal of this intermediary is to diversify risk.