One of the most common terms in the financing world is venture capital funding, which is necessary for some startups and companies to continue with their operations and to get the impulse they need to reach success.
It’s considered as one of the main ways of funding for early-stage startups that have a lot of potentials and that expect growth in the next following years.
How does Venture Capital Funding work?
Startups get funding from Venture Capital firms that are conformed by partners who decide how to invest the funds that they have.
When the firm decides to invest, they do it to become a financial partner and participate in the future incomes of the said startup. This kind of investment involves risk since there’s the possibility of losing the money if there’s no success in the venture.
The Venture Capital will depend on the stage where the startup currently is and based on that they will specialize in provide one specific type of funding.
This means that there are several types of Venture Capital Funding, and it’s very important for business owners to know each one of them so they can request the exact funding their startup needs.
What are the types?
The several types of Venture Capital Funding are based on the stages of the business, being the early stages the ones that represent the most risk for the firm, and the later stages the ones who have a shorter time of return.
Every company can apply to Venture Capital Funding in any period of its development, and this is why the classification is made following the stage in which the company is.
One of the advantages of requesting one type of funding to grow as a company is that not only you’ll receive the capital that you need, but you’ll also receive valuable information from your investors, resources, and assistance to reach success.
If you have an idea and would like to turn into a business, then you should be looking for seed capital. This is usually done when the idea is still on your mind but you haven’t organized your company and still haven’t started the production process, so you don’t have any product to sell.
It’s harder to get a Venture Capital Funding in this stage, and if you get it you’ll probably receive a small investment. So the best advice is to invest it wisely since it’s rare to get it you’ll want to make the best out of your capital.
You can use this capital to start your business since it is considered as low-level financing and it’s perfect to give shape to your idea and turn it into a good business that gives you the earnings that you want.
To request a startup capital, your company should have a sample product available, and should at least be working full-time at this stage. Your idea has started to run as a business, but you need to sell your product to make it profitable.
It’s also rare to get funding during this stage, but if you receive the money, you should invest it in expenses related to product development, marketing research, management aspects, and any other cost related to the introduction of your product to the marketplace.
Early Stage Capital
In this stage, the company has been working consistently and already has spent its starting capital in the production process, which means that the sales have been increasing and that there’s a management team working in place.
The Venture Capital funding in this stage is used to start business activities at the full-scale. This would help the company to increase sales, and improve and optimize the process to be more productive and efficient.
Most business owners decide to apply for this type of funding since it’ll be easier to get investors interested in being part of it if they see growth potential in the business.
The second-stage financing starts with the expansion capital. At this stage, the company is well established and needs the Venture Capital Funding to take its business to another level. The company has been selling the product and has seen good revenue, so now it has decided to take a chance in another market or maybe expand their scope, perhaps for selling internationally.
When you’re looking for this type of financing, you should look for investors who are specialized in this. This funding will help you enter new markets and even increase your marketing efforts so you can start seeking new horizons for your products and your company.
The purpose of this funding is to expand your company in a major way, by getting assistance from an investment that’ll help you reach your goal.
Late Stage Capital
The Late Stage Capital is necessary for companies that have already achieved impressive sales with their products, and that not only has a management team working on the place, but they have a second level of managers at work, which means that it has experienced significant growth.
The funding in this type of investment is used to increase working capital, to increase capacity or to give an impulse to the marketing strategy to get more revenue.
Bridge Financing: Going public
The last type of Venture Capital Funding is the Bridge Financing, used by the companies who are planning to merge, acquire certain parts or an entire company, or attract public financing by the Initial Public Offers strategy.
Since this is a more specialized type of investment, you should look for a firm that has experience with this end of the business spectrum. This is because this way you’ll also get advice on how to better use the funding.
It all depends on what the company wants to achieve, and based on this, it will receive the funding that it needs.
This financing can allow you to pay all the expenses related to going public, merging with another company, and with the acquisition of another company.