Thursday, August 20, 2009

VC Funding Rounds

If your business plan is one of the 1% that actually received funding from the VC, consider yourself lucky, maybe…

Anyway, VCs inject funds intermittently and when benchmarks are met. You will need to know the names of these “rounds” beforehand to know where you stand in the funding cycle and in a “nutshell”:

Seed Money

The initial small-amount investment made by investors other than the VCs (family, friends, and credit cards) to kick-start the venture for little or no collateral.

Start-up Money

Another round of pre-VC small-investments used to fund marketing and product development when you finally have something tangible. Angel Investors (think of them as you fairy god parents) come in and typically throw in a six-digit investment as debt or equity without meddling into the company’s affairs.

First-round or early stage capital

Once your idea is proven viable or worth further investigation, the VCs make their initial investment in exchange for ordinary shares in your company.

Second-stage capital

The venture is ideally breaking even. VCs assesses the venture’s situation and as the venture reaches certain success milestones such as actual market sales, more VC funding follows. If the VCs have second thoughts, they may re-think their investment entirely.

Mezzanine financing or third-stage capital

This follow-on funding that helps to expand the venture’s working capital. Ideally, the venture is starting to turn a profit and only needs more capital to “expand”. Funding is typically via debt or preferred stock. Here the venture is typically benchmarked against the competition, if any.

Bridge financing or fourth-stage capital

The last step in VC funding that sets the stage for the VCs divestment/exit either via IPO or trade sale. This is where both you and the VC get a nice big fat reward for the risks endured and can happen anytime between three to seven years of the VC’s engagement.

But be warned, that at anytime during the investment funding cycle, you or some other manager may be asked to step down from your post, but not as an investor. This is only natural as the venture starts to grow and take a life of its own.
After that, you can take that long planned trip to the Bahamas that you’ve been dreaming about.

Happy funding,

EZ the VC

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