Venture Capital Financing - Stages of Business Development

By: Len Stillman
Submitted: 2007-01-17 11:50:53
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There are many stages in venture capital financing. Defining the current stage of your project is important so you don't waste your time or the time of potential venture capitalists.

Early Stage Financing:

Seed Financing--A small amount of money is involved (usually $50,000 or less). Funds are used to develop a concept. This is the earliest stage of venture capital financing. The investor (often referred to as an angel) is expecting to reap a large percentage ownership should the concept prove to be feasible and marketable.
R&D Financing--This is a tax-advantaged partnership set up to finance product development. Investors secure tax write-offs for their investments. If the product becomes successful, they share in the profits.
Startup--Money is used for product development and initial marketing. While startup companies are organized, they typically have not yet sold their products commercially.
First Stage--The entrepreneur usually has developed a prototype. Funds are used to initiate full-scale manufacturing and sales.
Expansion Stage Financing:
Second Stage--In this stage, working capital is for the initial expansion of a company that is shipping products but may not yet be showing a profit.
Third Stage--This is also called "Mezzanine" financing. Capital at this stage is used for major expansion including physical plant expansion, marketing, and working capital.
Fourth Stage--This is also referred to as "bridge" financing. This is financing for a company expecting to go public within six months to a year. Often bridge financing is structured so that it can be repaid from the proceeds of a public underwriting.
Acquisition/Buyout Financing:
Acquisition Financing--Funds are provided to a firm to finance its acquisition of another company.
Management LBO--Funds are provided to enable an operating management group to acquire a product line from either a public or private company concern, often the very company they work for. (LBO means leveraged buy-out.)
Public Market--This is the purchase of over-the-counter stock. The venture capital investor is typically directly involved with improving the company.
(c) Copyright 2006, Leonard M. Stillman Jr., All Rights Reserved.

Len Stillman is the owner of Business Plan Tools, LLC and the Thrifty Shoppers Club. He has served entrepreneurs, banks, and investors for over 35 years. You are invited to learn more about the information in this article by visiting his Business Plan Tools blog.

Article source: Expert Articles

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