Stages of venture capital financing

* Seed or concept. This is the inventor stage. Companies that receive seed financing have an idea, but in most cases, they do not have a management team, a prototype, a business plan or a timetable. The seed stage ends with completion of a seed stage business plan and formation of a company.

VC firms have little interest in funding a company at this stage. The risk is often too high and there is no timetable for determining and achieving desired results. *Start-up. At least one principal person of the company is pursuing the project on a full-time basis. The business plan is refined, a management team is identified and market analysis is under way. Start-up stage companies are testing their prototype and attracting commercial interest. Fund-raising is a major effort.

VC firms may show an interest at this stage. They look for a top-rated management team and marketability. * First. The company is operating. Either the product is selling or customers have tried the service. The management team is in place, marketing is refined, the business plan is being adjusted and fund-raising efforts continue. First stage companies are trying to penetrate the market, achieve sales goals, reduce costs and increase productivity.

VC firms are very interested in investing in companies at this stage. In fact, it’s the most preferable stage. Financing is needed to deal with production problems, support marketing efforts and refine the product or service.*Second. Significant sales are developing as are assets and liabilities. Cash flow management becomes critical. Export marketing is being explored and more sophisticated management systems are being put into place. Second stage companies need consistent profitability, to expand sales, identify international marketing plans and obtain capital.

More sophisticated and second-round VC financing comes into play at this stage. Founders and investors start to form plans for the harvest.*Third (Mezzanine). All systems are go at this stage, and the potential for success is becoming apparent. Snags are being worked out in all areas.

Third-stage companies need to increase market reliability, begin export marketing, put second-level management in place and begin to “dress up” the company for harvest.

The company may need to obtain “bridge” or “mezzanine” financing to carry increased accounts receivable and inventory prior to harvest. * Four (Harvest). Companies at this stage are sifting and sorting out their options, which include going public, being acquired, selling out or merging. What started as a dream has become an entrepreneurial reality. The next challenge is to start all over again but this time with a pocket full of dollars.Source: Venture Associates