Types of Venture Capital Funding – Which One is Right for You?

First, a short definition of venture capital is needed. Venture Capital is money invested by a funding partner to a new, growing or troubled business. The decision to invest is taken knowing the risks involved, but also the potential future profits.

There are several types of venture capital, classified based on the stage of the business seeking for investment. The three main types of working capital are early-stage funding, growth funding, and acquisition/buyout funding.

After six stages of financing being completed, one can consider the venture capital funding procedure is completed.

These stages are:

1.Seed Money

If you do not have a product or a company yet, but you are just starting out, then you are looking for low-level financing. Investment capital at this stage may be used for market reasearch, fructifying an idea, making a sample product. Few VC funds decide to invest seed money and usually it is not a large amount.

•Start-up

Companies that have developed products or services can get start-up financing. They can use the money to finish product development and meet marketing expenses.

•First-Round

Usually granted to companies after 2 or 3 years of existence, this type of financing is used to increase sales, improve productivity, take their activities to full business scale.

•Second-Round

If you have sales, but no profits or have just break even, this is the stage your company is in. So what you will get is this operational capital.

•Third-Round

Also known as mezzanine capital, this type of investment will help expand into new markets or increase your marketing activity.

•Fourth-Round

Alson termed ”bridge financing”, the money is used for ”going public”. You have to know there are venture capital funds that focus their efforts on the end of business spectrum – mezzanine and bridge financing. They specialize in initial public offerings (IPOs), buyouts or recapitalizations.

While Early Stage Financing comprises seed money, start-up and first round financing, Expansion Financing is subdivided into second stage financing, third stage funding and bridge financing. Acquisition or Buyout financing sustains a company to acquire certain parts, products or an entire company.

Mezzanine Funding

Mezzanine funding – Short term lending for the long term benefit.

Mezzanine funding, in a generic sense, is a venture capital term used to describe funding for a company that is somewhere between being a startup and IPO, or Independent Public Offering. It can come in the form of stand-alone subordinate debt (the most common) or equity transactions. Sometimes it will start off a as a standard debt loan with interest, and if the initial loan is not paid back on time or in full the lender will take an equity ownership role.

Since there is a lot of risk involved for the lender, or investor the interest rate is much higher than a regular loan. The main purpose of this financing is to give a business the opportunity to get the capital they need much quicker while they wait to get a bank loan, or while they get their financing in order to improve chances of getting approved for a loan.

This additional financial leverage can facilitate:

• Mergers and acquisitions financing
• An emerging growth opportunity
• A management or other leveraged buyout
• Corporate debt refinancing
• Recapitalization
• Corporate restructuring

As subordinate debt, the rate and terms of mezzanine funding follows suit with the position it holds along the company’s evolution. As late-stage venture capital, its position, in many cases, is amidst the final round of financing prior to an IPO. Committed at this level, it usually has less risk as well as less potential appreciation than at the startup level. However, there is more risk with greater potential appreciation than in an IPO.

Seed Funding

Seed funding helps companies with a new product launch.

Seed funding is most often confused with startup capital, but they are two different things. It is provided to help a business develop an idea, create the first product, and market the product for the first time. Companies that typically qualify for seed funding are around a year old, and they have never created a product or service for commercial sale. The company is generally so young that the key management team has not yet been assembled, or if it is in tact it was recently formed.

Seed funding is most commonly provided by angel or other private investors. If your business uses an investor to gain capital there are some things to keep in mind. As the owner you will have to share your control of the business with the investors and you will also be required to share confidential business information with potential investors. Investors are also seeking to earn at least 30% on their money, so make sure your business can provide at least that much of a return before going after investors heavily.

Make sure that you also have a clear exit plan for the investment in place after a few years. In order to qualify for this sort of financing through an investor it is important that the market for your product be at least $1 billion total. These are just a few things to keep in mind when looking for an investor for your business.