Bringing your business idea into the real world and turning it into a successful operation is not easy. It requires careful planning, business acumen, and, most importantly, sufficient financing. Without the necessary funds to support it, any start-up would fail without even having the chance to prove if its product is viable. In the beginning, most will run on the funds that the founder is willing to put into the business. In order to grow, enter new markets, or scale their production, the start-up will eventually require external financing that typically comes in the form of venture capital.
Before going out and starting to seek venture capital from outside sources, the start-up’s founder must create a detailed business plan. This is a crucial element in figuring out the exact financial needs of the operation and where the acquired funds should go in order to bring the best ROI.
At this stage, it is paramount to get everything right. Consulting with an expert accountant could greatly help in this regard. Being assisted by professionals will ensure that the costs represented in the business plan are realistic and that they will factor in potential future developments or obstacles. Furthermore, it may be worth looking for accountants that operate in the same local area as the start-up, such as Howlader & co., if the start-up\’s main business is concentrated there. The experts could also guide you towards better venture capital sources or financing opportunities that may have otherwise been overlooked.
Early-stage Venture Capital
The early-stage venture capital is mainly obtained to support the development of the start-up\’s products or services. The funds can also be utilized in the initial marketing efforts of the company or in establishing the manufacturing and supply chain of the start-up. Funding at this stage falls mostly into the seed funding category. It is a private investment in exchange for equity. Typically, seed funding consists of lower total amounts when compared to other types of venture capital. A type of external financing known as pre-seed funding has been gradually growing in popularity. It is an unofficial round of financing that is not in exchange for equity and is meant to support any initial expenses.
The most common sources of seed and pre-seed funding include Angel investors, incubators and accelerators, as well as the founder\’s network of family and friends. Angel investors can be individuals or small entities with sufficient net worth who wish to take on a sizeable risk in supporting entrepreneurs or newly created small businesses. They are attracted by the opportunity to invest early in a potentially winning idea that will bring them significant profits when fully realized. Angel investors provide the funds in exchange for equity and the option to offer guidance and mentorship to the new business.
First stage financing is also considered a form of early-stage venture capital. If the company has already managed to establish its own user base and is generating consistent revenue, it can try to attract potential investors through the sale of Series A equity. A successful round of Series A funding will further validate the start-up\’s model and idea. Usually, the participants in this type of funding are traditional venture capital firms.
Expansion financing encompasses any rounds of second-stage or Series B funding, bridge financing, and third-stage or series C funding. Capital obtained via Series B funding is utilized to expand further the operations of a company that has already managed to carve its niche in the market. It can also be used to attract experienced or highly skilled experts to join the company’s teams.
Bridge financing is primarily a short-term finance option that is interest-only and doesn’t involve any equity. In most cases, this type of funding option is geared toward helping the company cover the costs associated with its IPO (Initial public offering).
Characteristics Of Venture Capital
Venture capital can provide precisely the correct amount of funding that the start-up needs at that specific moment in its growth. Its most significant advantages include the fact that due to the equity component, the start-up has no obligation to repay any of the acquired money. On top of that, the start-up gains valuable access to information, resources, and insights to help it turn into a successful operation. However, the major downside is that the investors become part owners of the company, which could significantly impact the autonomy and control of the start-up\’s founder.