The Venture Capital Process

Because you are just starting you may not know exactly how the venture capital process works. The venture capital process works in a series of stages. This page will break down the many stages:

Seed financing

This is the first stage in venture capital and begins when idea is still being formed and is not fully developed or live. The creator is given a small amount of money to come up with the first design or beta version. This money is usually from the creators pockets but also can come from family, friends, or "fools" and sometimes angel investors.

Startup financing

The project is starting to come together, there is at least one full time principal and the product is expand and getting ready for the first official launch. The most likely place that this funding will come from are angel investors but there are also some early stage venture capitalists.

First Stage Financing

The start up has launched and it is starting to see results, increases in sales and a team of employees is in place. First stage financing helps the firm reach its breakeven point and increase productivity while cutting unit costs and also building corporate infrastructure. This is usually in the 2nd or 3rd year of the company.

This is where true venture capitalists start to get involved. It's important to notice that true venture capitalists don't like to get involved until the project is really showing promise.

Second Stage Financing

The company is really moving now, sales are growing and there is lots of inventory on hand. This stage involves rapid expansion including marketing expenses and entering new markets. This is mostly powered by venture capital firms.

Third Stage

The company is clearly going to succeed, everything is going well with the company and expansion is rapid. This is more funding to keep the expansion going.

Mezzanine or Bridge Financing

The company is a proven success and it plans on going public very soon. Bridge funding is short term financing before the company goes public. Clearing out old debt, buying out early investors, and paying for other costs before going public are all in this stage. The company is about to hit the big time. There are venture capitalist firms and bridge financing specialists that can assists with this stage. They are usually paid back after the company goes public.

Initial Public Offering (IPO)

The company finally has reached liquidity and it's stock can be bought, sold, and traded in public. Founders often leave the project at this point and try to start from square one again. Most startups never reach the IPO or Bridge stages but in the end it's the ultimate goal of any company with high aspirations. Other companies can also have some variations of these phases with more funding at a certain step.

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