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Venture Capital Financing

Venture capital financing involves several stages of private funding for startup companies, with the goal of an initial public offering or acquisition. There are typically five stages: seed funding provides initial capital; startup funding develops the prototype; second stage funding focuses on market testing and competition; third stage expands market share; and the bridge/pre-public stage prepares the company for an IPO.

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154 views5 pages

Venture Capital Financing

Venture capital financing involves several stages of private funding for startup companies, with the goal of an initial public offering or acquisition. There are typically five stages: seed funding provides initial capital; startup funding develops the prototype; second stage funding focuses on market testing and competition; third stage expands market share; and the bridge/pre-public stage prepares the company for an IPO.

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RAMANDahg
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Venture capital financing is a type of financing by venture capital: the type of private equity capital is provided as seed funding

to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round

) in the interest of generating a return through an eventual realization event such as an IPO

or trade sale of the company. There are five common stages of venture capital financing[citation needed]: 1. 2. 3. 4. 5. The Seed stage The Start-up stage The Second stage The Third stage The Bridge/Pre-public stage

The number and type of stages may be extended by the VC firm if it deems necessary; this is common[citation needed]. This may happen if the venture does not perform as expected due to bad management or market conditions. The following schematics shown here are called the process data models. All activities that find place in the venture capital financing process are displayed at the left side of the model. Each box stands for a stage of the process and each stage has a number of activities. At the right side, there are concepts. Concepts are visible products/data gathered at each activity. This diagram is according to the modeling technique founded by Professor Sjaak rinkkemper of the University of Utrecht in the Netherlands.

The Start-up Stage

The Start-up Stage


If the idea/product/process is qualified for further investigation and/or investment, the process will go to the second stage; this is also called the start-up stage. A business plan is presented by the attendant of the venture to the VC firm. A management team is being formed to run the venture. If the company has a board of directors, a person from the VC firms will take seats at the board of directors. While the organisation is being set up, the idea/product gets its form. The prototype is being developed and fully tested. In some cases, clients are being attracted for initial sales. The management-team establishes a feasible production line to produce the product. The VC firm monitors the feasibility of the product and the capability of the management-team from the board of directors. To prove that the assumptions of the investors are correct about the investment, the VC firm wants to see result of market research to see whether the market size is big enough, if there are enough consumers to buy their product. They also want to create a realistic forecast of the investment needed to push the venture into the next stage. If at this stage, the VC firm is not satisfied about the progress or result from market research, the VC firm may stop their funding and the venture will have to search for another investor(s). When the cause relies on handling of the management in charge, they will recommend replacing (parts of) the management team.

The Second Stage

The Second Stage At this stage, we presume that the idea has been transformed into a product and is being produced and sold. This is the first encounter with the rest of the market, the competitors. The venture is trying to squeeze between the rest and it tries to get some market share from the competitors. This is one of the main goals at this stage. Another important point is the cost. The venture is trying to minimize their losses in order to reach the break-even. The management team has to handle very decisively. The VC firm monitors the management capability of the team. This consists of how the management team manages the development process of the product and how they react to competition. If at this stage the management team is proven their capability of standing hold against the competition, the VC firm will probably give a go for the next stage. However, if the management team lacks in managing the company or does not succeed in competing with the competitors, the VC firm may suggest for restructuring of the management team and extend the stage by redoing the stage again. In case the venture is doing tremendously bad whether it is caused by the management team or from competition, the venture will cut the funding.

The Third Stage

The Third Stage This stage is seen as the expansion/maturity phase of the previous stage. The venture tries to expand the market share they gained in the previous stage. This can be done by selling more amount of the product and having a good marketing campaign. Also, the venture will have to see whether it is possible to cut down their production cost or restructure the internal process. This can become more visible by doing a SWOT analysis. It is used to figure out the strength, weakness, opportunity and the threat the venture is facing and how to deal with it. Except that the venture is expanding, the venture also starts to investigate follow-up products and services. In some cases, the venture also investigates how to expand the life-cycle of the existing product/service. At this stage the VC firm monitors the objectives already mentioned in the second stage and also the new objective mentioned at this stage. The VC firm will evaluate if the management team has made the expected reduction cost. They also want to know how the venture competes against the competitors. The new developed follow-up product will be evaluated to see if there is any potential.

The Bridge/Pre-public Stage

The Bridge/Pre-public Stage

In general, this is the last stage of the venture capital financing process. The main goal of this stage is for the venture to go public so that investors can exit the venture with a profit commensurate with the risk they have taken. At this stage, the venture achieves a certain amount of market share. This gives the venture some opportunities, for example:

Merger with other companies Keeping new competitors away from the market Eliminate competitors

Internally, the venture has to examine where the product's market position and, if possible, reposition it to attract new Market segmentation. This is also the phase to introduce the follow-up product/services to attract new clients and markets. Ventures have occasionally made a very successful initial market impact and been able to move from the third stage directly to the exit stage. In these cases, however, it is unlikely that they will achieve the benchmarks set by the VC firm.

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