Venture Capitalists are those individuals who invest on a business or start-up having thoroughly analyzed its potential, with the aim to uplift its performance and generate greater returns from it.
Depending on the stage and type of businesses, there are three principal types of venture capital funding:
- Early Stage or Seed Funding
- Growth Funding
- Acquisition Funding
The investment on the startup as a part of its working capital goes through multiple stages of funding.
The Early Stage Financing contains:
Seed Funding: It is the most basic level of funding intended to be used to validate the idea and prepare it to be taken to the advanced stages.
Startup Funding: These are a set of funding rounds which are provided to get the start-up up and running from setting up its service / platform, hiring employees, completing legal and acquiring initial pool of customers through marketing.
Initial Stage Financing: The primary objective of initial stage financing is to kickstart new business strategies after usage of the preliminary funding in setting up the business.
The Growth / Expansion Financing contains:
Second Stage Funding: This is provided to companies who want to expand through a very major approach. By then, it would have gone through all the market validation and customer acquisition rounds and the concerned parties are sure of its running. A bridge funding is provided to stabilize the position of the company until the bigger fund is sanctioned to them.
The Acquisition or Buyout Funding contains:
Acqusition Funding: It is provided to a business with the interest of it, acquiring some or a whole of other businesses. It helps companies scale up, expand and improve its operations. The funding is offered to companies with a good stream of revenue and stability acquired in the market.
Buyout Funding: It is a more focused form of funding wherein the company is assisted to acquire a particular part of product of another company.
From the infant stage to a fully-fledged and running business, a start-up would have to go through multiple stages of funding constantly fulfilling the requirements of each stage. One advantage with Venture funds is that the company need not repay the money directly. As a return for the investment, equities are provided to the investors which determine their share in the profit. Although it can be argued that the authority of the owners are lost in the process, the right funds and the right investors can only bolster the team and the product as a whole.
Apart from working with the idea directly, a start-up aiming to make it big, must also continuously endeavors towards acquiring these funds.