Venture capital – and other financing options for your business
When is the right time to consider venture capital or private equity for your enterprise? Initially, every entrepreneur must first see if they have exhausted all other options. Normally, a company would have low capital when looking at private investors. However, there are multiple sources of equity capital, including friends and family, business angels, venture capital, corporate/strategic investors, private equity firms, or entrepreneur’s equity.
For those looking for $500k+ capital, look to VCs. For smaller investments, entrepreneurs should look for a business angel or debt capital. Therefore, understanding the different types of funding stages is useful, so see below.
Pre-financing is financing that is needed before the physical construction of the enterprise. Usually, this funding goes towards putting together a good business plan that can impress potential investors.
Seed funding is funding that is needed to start building the company. Some companies may be able, if appropriate, to skip this funding phase, but seed capital is usually the capital needed to get the basics up and running. Usually at the start-up stage, a company is not yet ready to open a business and this financing is usually used to rent office space, real estate, equipment needed to produce the company’s product or service
Seed funding is less often invested by venture capitalists and is not necessarily large funding. Seed funding can range from $100k to $500k. It rarely exceeds $1 million. Seed capital can also be raised from a business angel, friends and family, or the entrepreneur’s own funds. Only 15% to 25% of venture capital invests in seed funding.
Early stage funding is usually where VCs are sought after. A company is usually ready to trade but requires additional capital for wages.
Later stage funding also known as expansion/growth stage funding is for companies that are doing well and looking to expand.
There are many ways entrepreneurs raise seed capital to get started. These conventional ways include raising debt capital from a business lender, commercial bank or angel investor who are willing to invest seed capital in the business. Other more inventive entrepreneurs raise seed capital by raising debt capital, equity capital, and funding from friends and family. VC is usually raised with early stage funding ie. as above, Series A or Series B funding. In most cases, VCs will not invest less than $1 million in a company.
Understand them and you’ll be off to a good start and be taken seriously.
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