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The Venture Capital Series: The Stages of Venture Capital

Posted 04 May 2016 | BY Sansan

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It takes money to make money – this is the reality that any new business owner is aware of. While some may head to the bank or take a second mortgage to fund their passion, there are other options open to your business as you embark on your journey – one of them is venture capital (VC).

Having explained how VC works, we now look at the different stages of VC funding.

Seed stage

If your business is just getting started, seed stage funding can help acquire funds to experiment with ideas and incubate the best ones for future opportunities. This is often how VC incubators such as Spaze Ventures Pte Ltd identify and attract new businesses, offering advice and funding opportunities in return for access to new, interesting ideas and an early chance at equity in the emerging business.

That said, there are disadvantages to taking money this early in the process, as you're forced to hand out equity and potentially devalue your business later. In any case, seed stage funding offers a chance at early money to try new ideas and attract general interest before diving into a full-blown start-up.

Start-up capital

Let's say you're ready to make the jump and start your business. You have the ideas and the talent – you just need the money to get the gears turning. This is where start-up capital comes in. The money is often the bare minimum you'll need to get a space to start building your business from, or to recruit your key management. VCs can emerge as an alternative to the costly mortgage or loan in return for an early equity stake. If you've done a seed funding round, then you might also be able to better value your business and reserve a more conservative amount of your equity.

Early stage capital

As you get your start-up capital and the business off the ground, you'll hopefully begin to see things grow. From this point forward, it's up to you to figure out when you'll need a cash infusion, depending on the particular goals and growth your business will have in the months ahead. The purpose of early stage capital is twofold. First, it's an opportunity to reassess your business and identify opportunities in growth, maintenance or investment that a cash infusion can help with. For instance, if you find your hardware is reaching its capacity, early stage capital can help fund a new data centre or increase in IT staff.

The other advantage of an early stage funding round is the access to a clear valuation, and an opportunity to add on partners for strategy and support. In VCs, especially among angel investors, your financiers are not banks, simply collecting interest and expecting a certain return. Instead, they care deeply about your business goals and want to align with the metrics you use to measure success. Getting a valuation helps realise how others perceive your business while developing new relationships and opportunities as your business grows.

Expansion capital

When a business is eyeing expansion capital, the goal is to do something very clear – expand. By the time you consider expansion stage funding, you should already have a clear plan and structure to your business that simply needs replication to grow rapidly. For example, expansion capital is extremely helpful if your business sells software in Asia, and you're ready to jump into Europe or the Americas for a new client-base and added scalability. In addition to broadening boundaries, expansion capital can also help align businesses in need of greater efficiency to improve margins and identify opportunities to become profitable. If a business can build a new factory in a new region and reduce costs by 20 per cent, expansion capital can help achieve just that without convincing a bank or attracting debt.

Late stage capital

Let’s say your business has grown, but is very expensive to run. Late stage capital is helpful for funding growth-focused business models that care about building larger customer bases, improving operations and developing new strategies. At this point in maturity, the equity stakes are usually much smaller and valuations much larger, as long as your business has demonstrated the growth and value it can offer.

What comes next?

VC funding is just one step in a journey as your business turns ideas into reality. If your business continues to grow and requires funds to do this, then you're on the heels of something even greater – an Initial Public Offering (IPO). Sometimes, late stage capital can be seen as an early chance at a business soon to make an IPO, offering an effective litmus test at your company's valuation.

All of these are factors to consider as you fund your business from its first idea into a successful, growing business nearing profitability, ready for its next big step forward.