Knowing Your Funding Options – Entrepreneurs and business experts have defined venture capital as a financing style between a capitalist and an entrepreneur with a common goal of a handsome return in a short period of time, maybe 3 to 5 years. But while there are several resources on the definition and characteristics of this topic, few have actually discussed the options of this kind of business arrangment.
Before taking the plunge, know what these options are and how they can be applied to your current business plan.
The funding option depends on the stage of a company’s progress. Investment firms can invest from $50,000 up to $20 Million. If a company is still in its earliest stage, when a concept or invention is still to be developed or proved, the option is called seed financing. Here investment is spent on marketing and product development. Product ingenuity and market research are the areas that are stressed.
When the company has already developed its product and marketing strategy but needs money for the actual production and initial marketing, the funding option is called start-up financing. This is the most common option for new entrepreneurs and inventors. In this case funds are spent for production and initial marketing. Amounts can range from $50,000 to $1 Million.
Sometimes a company already has its products and may have initially introduced them to the market, but receives little or no revenue at all. In this case, the entrepreneur may need financial assistance in what is called the first or early stage. The funding amount usually ranges from $500,000 up to $15 Million, depending on the extent of changes that are needed. The product may need to be revised or developed to make it more saleable. Or it may merely require repackaging or a change in advertising strategy.
The next option is called the second or late stage. The company has its products and may have received revenues. There is potential for making it big in the near future. But for some reason the company has no funds at hand. It could be that there are loans that need to be repaid, or other financial obligations that need to be resolved. This is why venture capital firms may invest from $2-15 Million to help the company.
Some profitable companies want to expand, but they do not want to put in more capital out of their own pockets. Their goal is not to keep the company for many years. Rather they seek quick growth to get to an IPO within a few months. This option is called the third or mezzanine stage. Amounts range from $2 Million to $20 Million.
Similarly, this next option may provide an investment before an IPO, but the time frame is 3-12 months. This is called the bridge. Investment is also between $2 Million to $20 Million.
Remember that there are specific options for each stage of your company’s development. The key is to know what options to use. Similarly, you must know how and where to find these venture capital firms. You must also develop a concise but comprehensive business proposal to present to them. Lastly, keep in mind that venture capital is not the end-all but just the beginning of more challenging things to come.