The 5 Key Stages of Venture Capital Financing

Venture capital financing is often an attractive option for businesses that have big ambitions and the potential to grow, but need some additional funding to put their plans into action.

It can also prove vital for companies that are unable to access finance from traditional lenders and entrepreneurs who are looking to scale a business quickly.

If securing funding from an external investor in exchange for a share in the business seems like the right option for you, here are the key stages of the process you need to know:

1.    Pre-seed stage

At the very beginning of the funding process for many businesses is the pre-seed stage, which is where you're just starting to get your operations up and running and you need to cover your essential start-up costs. Some don’t consider this phase part of the wider venture capital financing cycle, since it may not involve a lot of commitment from external investors.

During this early phase of a firm's development, the key funders are more likely to be the founders themselves, or possibly close friends, family and other acquaintances willing to offer some support to help get the enterprise off the ground.

The level of funding you need at this stage depends on the nature of the business and the costs involved in your basic operations. If you can get up and running with relatively little financing, you can move through the pre-seed stage quickly and focus on the next phase.

2.    Seed funding

This is when you're starting to think about securing more substantial funding in exchange for equity in your business. The seed stage gives you the opportunity to secure the capital you need to pay for activities that will facilitate the company's growth and revenue generation, such as:

• Conducting more extensive market research
• Product research and development
• Employing more people

While friends and family who have money to invest could still be involved at this stage, seed funding is likely to involve bigger backers who can offer the financial capacity you need to grow. Venture capital firms are a common source of seed funding, as are angel investors, who might be able to make a substantial one-off investment to secure a share in your business.

The numbers involved will depend on the investor and the nature of your venture, but the seed funding stage is typically the point where you can start thinking about generating capital amounts in the millions of dollars.

3.    Series A funding

Series A funding is the next step to take once you've established a track record for success and demonstrated that the business is capable of achieving further growth and delivering bigger returns for investors. It's typically provided to companies that are generating revenue, but are still at the pre-profit stage.

Seed financing can be secured on the basis of projections and investor evaluations of the potential of your venture, but to raise series A funding, you'll need to show clear evidence of performance. This could be in the form of:

• Annual recurring revenue figures
• An established and loyal customer base
• Proven demand for your product

Series A funding rounds can raise anywhere between $2 million and $15 million in additional capital, which could prove vital if you have plans to expand your product offering or launch in new markets.

4.    Series B funding

Once you reach the series B funding level, the business is well and truly beyond the development stage and has a proven product or service that is ready to be rolled out on a larger scale. As well as achieving steady turnover, you should also be looking to generate profits.

Series B investors can provide the capital you need to realize your aspirations to build the business by expanding your market reach.

At this point in the venture capital financing cycle, companies can typically gain anything from $7 million to $30 million in new investment. This can help to fund activities essential to future success and growth, such as:

• Acquiring the necessary skills and talent to bolster your workforce
• A more aggressive business development plan
• Increased sales capacity
• Advertising
• Tech support

5.    Series C funding

Companies that reach the series C stage of funding will already be considered successful businesses, having established a strong position in the market and delivered a substantial increase in value for backers who came on board at the seed or series A stage.

Series C investment is generally considered a safe bet, from a venture capital point of view, since the organization already has a track record for success and profitability.

One of the common reasons for companies to require investment at this stage is if they're looking to acquire another firm, potentially a smaller competitor in their marketplace.

This round of funding can also be used as an exit point for venture capital investors, or as an opportunity for the business to boost its value before an initial public offering.