Stages of Financing

These are the typical funding stages that a startup moves through over the course of its life. Post IPO (i.e., Initial Public Offering) financings are not covered here as the focus is on the privately-held phase of the company's life.

Seed or Concept stage financing: The venture is still in the idea formation stage and its product or service is not fully developed. The usually lone founder/inventor is given a small amount of capital to come up with a working prototype. Monies may also be spent on marketing research, patent application, incorporation, and legal structuring for investors.

It's rare for a venture capital firm to fund this stage. In most cases, the money must come from the founder's own pocket, from the "3 Fs" (Family, Friends, and Fools), and occasionally from angel investors.

Startup financing: The venture at this point has at least one principal working full time. The search is on for the other key management team members and work is being done on testing and finalizing the prototype for production or launch of version 1.0.

Early stage venture capitalists--who are as rare as hen's teeth--may fund this stage. But more likely, it will be sophisticated angel investors..

First -stage financing:  The venture has finally launched and achieved initial traction.  Sales are trending upwards. .A management team is in place along with employees.  The funding from this stage is used to fuel sales, reach the breakeven point.,  increase productivity, cut unit costs, as well as build the corporate infrastructure and distribution system. At this point the company is two to three years old.

It's at this stage that venture capitalists prefer to get involved.  How will you get to this stage without venture capital? Click here for the answer.

Second -stage financing: Sales at this point are starting to snowball. The company is also rapidly accumulating accounts receivable and inventory.  Capital from this stage is used for funding expansion in all its forms from meeting increasing marketing expenses to entering new markets to financing rapidly increasing accounts receivable.

Venture capital firms specializing in later stage funding enter the picture at this point.

Third stage financing:

At this stage the future is so bright the founders "gotta wear shades" to borrow a phrase from the old pop tune. Everything looks good. Sales are climbing. Customers are happy.  The second level of managers is in place.

Money from this financing is used for increasing plant capacity (or other capacity depending on the nature of the business), marketing, working capital, and product improvement or expansion.

Mezzanine or Bridge financing:

At this point the company is a proven winner and investment bankers have agreed to take it public within 6 months. Mezzanine or bridge financing is a short term form of financing used to prepare a company for its IPO.  This includes cleaning up the balance sheet to remove debt  that may have accumulated, buy out early investors and founders deemed not strong enough to run a public company,  and pay for various other costs stemming from going public.

The funding may come from a venture capital firm or bridge financing specialist. They are usually paid back from the proceeds of the IPO.

Initial Public Offering (IPO):

The company finally achieves liquidity by being allowed to have its stock bought and sold by the public. Founders sell off stock and often go back to square one with another startup.

Please note that  some companies have more financing stages than shown above and others may have fewer. Very few reach the bridge and IPO stages. It all depends on the individual company.

Before approaching a venture capital firm you need to first confirm that it invest in the financing stage your company needs.

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