Stages of Venture Capital Financing

A comprehensive typology.

Did you ever wonder what is the commonly used terminology relative to stages of Venture CapitalFunding? I did, and after some research, I found several ways to define those stages, and the following typology seemed most comprehensive.

Early stagesmall business success

  • Seed — A relatively small amount of capital provided to an inventor or entrepreneur to prove a concept. It may involve product development, but rarely involves initial marketing.
  • Start-up Financing  — provided to companies for use in product development and initial marketing. Companies may be in the process of being organized or have been in business a short time (1 year or less), but have not sold their product commercially. Generally, such firms would have assembled the key management, prepared a business plan, and made market studies.
  • First stage — Financing provided to companies that have expended their initial capital (often in developing a prototype) and require funds to initiate commercial manufacturing and sales.

Expansion:

  • Second stage — Working capital for the initial expansion of a company that is producing and shipping and has growing accounts receivable and inventories. Although the company has clearly made progress, it may not yet be showing a profit.
  • Third stage — Funds provided for the major growth expansion of a company where sales volume is increasing and which is breaking even or profitable. These funds are utilized for further plant expansion, marketing, and working capital or development of an improved product.
  • Fourth stage — The last round of prior to, but not in anticipation of, a public offering or prior to the point at which a company can qualify for credit-oriented institutional term financing. This round may enable institutional term financing, or may involve turnaround aspects.
  • Bridge financing — Financing for a company expecting to go public within 6 months to a year. Often bridge financing is so structured that it can be repaid from proceeds of a public underwriting. It can also involve restructuring of major stockholder positions through secondary transactions. This would be done if there were early investors who wanted to reduce or liquidate their positions or if management had changed and the stockholdings of former management, their relatives, and associates, were to be bought out to relieve potential overhead stock supply when public.

Leveraged buyouts and acquisition:

  • Acquisition for expansion — Funds provided to a firm to finance its acquisition of another company.
  • Management/leveraged buyout — Funds provided to enable operating management to acquire a product line or business (which may be at any stage of development) from either a public company or private company (often such companies are either closely held or family-owned). This usually involves revitalization of the operation, with entrepreneurial management acquiring a significant equity interest.

Other: 

  • Turnaround — Financing provided to a company at a time of operational or financial difficulty with the intention of “turning around” or improving the company’s performance.
  • Secondary purchase — Purchase of securities from another venture capital firm, other stockholders, or on the open market.

We. at truCrowd, will focus only on the “Early Stages”  and the “Expansion” stages. We think those make sense for equity based crowdfunding.

Please share with us your ideas and opinions on this typology. Thanks!

Posted in Capital Formation, Equity Crowdfunding, Investors, Start-ups

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