The Startup Financing Cycle: Raising Capital For Your Venture

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You have been working on your project for some time now. You may have developed a prototype or you may already be running operations. If you think it’s time to raise some capital to get your company to that next step, the first thing you should know is the basics of startup financing. I have thus broken down for you the different stages of a startup financing cycle, in order to help you assess in which category your company is and the type of financing you may require.

1. The Seed stage: If your product or service is still at a prototype phase, you may need capital to finance its early development, establish a proof-of-concept, do some market research or cover administrative costs. This is seed stage. Your main contributors at this point are likely to be yourself, your personal network and angel investors.

2. Startup stage: You have been running your business for a little while and you have already tested the market, but your company is making few or no sales. You will need the capital at this stage to further product development, jumpstart marketing and cover overhead expenses. At this point, venture capital (VC) firms can start being interested in investing in your company, if they see enough potential. Keep in mind that VC firms generally specialize by industry (e.g. Technology, health care, etc), they take some equity in your company and they expect a minimum return.

3. Early stage: You have been running the business for a couple of years now and you have set up a management team and a structure to run commercial operations. Funding at this stage is often required to cover cash flow requirements.

4. Second stage: You may have been selling your products or services for some time but your business is not yet profitable. Companies at this stage will generally require financing to expand engineering, technology platforms, sales, marketing, and manufacturing capabilities, as well as to cover working capital, overhead and inventory costs.

5. Third stage: At this stage, the company is usually at or near break even or profitable. Third stage financing will generally help the company expand its operations, facilities and marketing program to sell products at a much larger scale.

6. Mezzanine Financing Phase: Here we start getting into what is called ‘late stage financing’. At this point, the company already has a solid base and is looking to finance a major expansion through the issuance of debt or more equity. The deal becomes less risky for investors and in addition to VC funds, the company can get financing from other sources like banks and Institutional Investors.

7. Bridge Financing Phase: Companies seeking bridge financing are mature, profitable, and are enjoying expansion. They are generally looking for a short-term loan to finance the cost of an Initial Public Offering (IPO). Bridge financing can also provide short-term cash needs for distressed companies looking for an acquirer.

Whether your end goal is to expand your business, go public on the stock market, merge or get acquired by a bigger company, there are a lot of factors to consider before raising capital. Indeed, once you get out of your basement, keep in mind that the more capital you receive, the more liable you become, for you will be answering to shareholders and lenders. This will then influence the decisions you will make for your business, and your company’s vision and culture.

Finally, you may take a look at this chart to get a visual idea of a startup financing cycle.

Startup_financing_cycle.svg_

 

Source: Startup Factory

Chart: Wikipedia

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