Funding is funding – or so you may think. While companies and entrepreneurs need funding to grow their businesses, it’s often a case of careful what you ask for. Depending on the type of funding you ask for, it could impact your business venture in different ways along its lifecycle.
As an entrepreneur or investor, it’s good to know the Venture Capital (VC) lingo and what stage you are in/are looking for. Here is a quick guide on the types of funding, from seed to public.
Angel: usually invests up to US$1-m, 50% or less equity, startup or seeding
Venture Capital: usually invests at least US$1-m, 50% or less equity, startup or seeding
Private Equity: usually buys 51%-100% equity, mature business
“seed” – the investor is cultivating the seed of the business, taking up equity before it grows into a fully blooming business. These investments are relatively small, but the equity demanded is relatively high (highest risk).
Seed capital is different to venture capital – which tends to be more complex and institutional.
Seed is to get the company’s foundation laid down – series funding follows.
Series A – optimise for revenue growth: the track record has been proven, now’s the time to cement the business model and revenue streams. The focus here is on research and development and figuring out the direction in which the company should scale. This is high risk (even for venture investing).
Series B – optimise for scalability and sustainability: now’s the time to employ more people and establish a foothold over more markets, scaling up the entire operation and ensuring its success by delegating to as much talent as possible. The focus here is on moving the business past the development stage and into new markets: repeating what was established in Series A. Medium risk.
Series C – go big: the business is healthy in all areas: it’s a no-brainer for most investors. In this round of funding, investors believe that the business is a sure thing, provided it continues its momentum and/or tweaks a few things. Investors invest believing they will more than double their money at this point. This funding round means that the business has an air of confidence about it. Many founders/early investors will be bought out at this point. This is also where most mergers and acquisitions take place, as shareholders identify key opportunities for strategic growth. (Relatively) low risk (by venture investing standards).
The company is considered successful. The business model is sustainable, lucrative and repeatable. Operations are optimised. Now everyone wants a piece of the pie: the company’s major shareholders decide to list the shares publicly via an Initial Public Offering (IPO), where they can be traded by anyone. The company’s proven business model should continue to attract investors. Strategically, the company will look to larger factors affecting shareholder sentiment, such as competitors, technological advances, legislation, etc. wherein the focus moves more into risk mitigation, than operational scalability.
by Stuart Allen