Raising Venture Capital ? The Stages

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Raising venture capital often occurs in stages. Below is an overview of the stages of the process of obtaining funding as you are looking for venture capital:

Seed Capital – Startup Capital: This is typically the first stage of the process when raising funding for your new business venture. At this point, you should have a completed business plan, an incorporated business, and all other appropriate documentation in place in order to secure a capital commitment from a venture capital firm. The appropriate documentation, as discussed earlier in our articles, includes your business plan, private placement memorandum (if required), PowerPoint Presentation, and a subscription agreement. This round of capital is usually the most expensive as at this stage in your business operations – you are an unproven business. The seed capital or startup capital phase is often also referred to as first stage funding/financing.

Mezzanine Capital or 2nd Round Capital – This round of capital typically occurs within one to two years of launching your business’ operations. Sometimes, it is not required if your firm is producing enough positive cash flow to reinvest into your business. This round of capital is far less expensive than the initial first round of venture capital funding. This is especially true if your venture is currently profitable. Again, venture capital firms often have the right of first refusal to make additional investments into your business, so it is possible that you may only work with one venture capital firm through the life of your business. It should be noted that some venture capital and private equity firms only specialize in mezzanine capital.

Final Stage Capital – IPO: Unless your business is expected to remain as a privately held corporation, then typically your final stage of capital is related to the initial public offering of your business. This stage is omitted if your business will be sold privately to a larger corporation. However, this usually provides less of a return for both you and a venture capital firm. In our next discussion, we will discuss initial public offerings and how it can impact looking for venture capital.