Venture Capital Funding

Venture capital is funding provided to early (and later) stage companies with high potential. While the risk is high, if the company succeeds the reward can be great. The venture capital fund makes money by taking equity in the company upon making a round of funding.

Venture capital is attractive for many reasons:

• Allows them to obtain the funding necessary to take their organization to the next level
• Gain advisors with industry knowledge
• Unlike a bank loan, the money does not have to be repaid (although, equity is given)

In exchange for funding, the venture capital firm will gain equity in the company as well as significant control over important decisions. For this reason, startup companies must weigh the pros and cons of taking on early funding.

According to the National Venture Capital Association, roughly two million businesses are formed every year in the United States. Of these, approximately 600-800 receive funding from venture capitals.

Venture Capital Financing Stages

Generally speaking, there are six stages of venture capital funding:

Seed money.

This is low level financing that is often times provided by an angel investor. It is used primarily to judge and/or prove the effectiveness of an idea.

Start-up.

Perfect for early stage companies that need money for expenses associated with product development, employees, and marketing.

First round.

This is also known as Series A.

Second round.

With this, working capital is provided to early stage companies that have yet to turn a profit.

Third round.

Also known as mezzanine financing, it is used for expansion money – primarily for companies that just became profitable.

Fourth round.

Often times known as bridge financing. This is used to fund the expenses associated with taking a company “public.”

With many different financing stages, companies of all sizes and in a variety of industries can seek venture capital funding.