Several stages of venture capital financing can take place when you're trying to fund your company. These stages can include the start-up stage and the bridge stage.

What is Venture Capital?

When you're looking for funding for a start-up company and receive a private investment or an investment made by an institution, these investments are known as venture capital. Essentially, an investment of venture capital is made with the knowledge that there is a great deal of risk involved but also the possibility of a big return on investment.

Venture capital investments are usually made in small companies that have exciting potential for future growth. Venture capitalists are people who make these investments.

When a venture capitalist makes an investment, they are buying a certain amount of company shares, making themselves a financial partner in the start-up company. Patient risk capital and risk capital are two terms that mean essentially the same thing as venture capital.

Both individuals with a high net worth and institutions focused on investment can provide venture capital. Normally, all of a start-up's venture capital will be stored with an investment firm.

A company may seek venture capital from outside investors for several reasons, including:

  • The company is new and needs money to help it get off the ground.
  • The company has started to grow and needs funding for its expansion.
  • The company is in financial trouble and needs assistance.

Venture capitalists know that a risk is that they may not receive any profit from their investment if the company fails. When a start-up receives venture capital, they will give the investor an equity stake in the company. This makes a venture capital investment an exchange instead of a loan.

Benefits and Drawbacks of Venture Capital

One of the biggest benefits of seeking venture capital is that it can add wealth to your business, as well as the expertise of the investor. Depending on the person or institution making the investment, you may receive a large amount of equity. In addition, your business will not be responsible for repaying the investment, as the investor has received an equity stake in your company in exchange for their money. Besides capital, your company can receive several benefits from pursuing these investments, such as:

  • Providing valuable information to your company.
  • Increasing your resources.
  • Gaining access to technical assistance that can help your business succeed.

Venture capital financing also has several drawbacks. For instance, as the investors will now partly own your company, you will no longer have autonomous control of your business. Also, the process of acquiring venture capital can be very complex and time consuming.

Stages of Venture Capital Financing

The seed stage is the first venture capital financing stage. The amount of money that you receive in this stage will be relatively small compared to the amounts you can receive in later stages. The purpose of seed money is to provide you the financing you need to develop a service or product.

Generally, during the seed stage, your company has just started, and it's likely you won't even have a service or product that's ready for commercial rollout. Seed stage investments can be used for several projects, including:

  • Developing a product.
  • Performing market research.
  • Hiring a management team and writing a business plan.

The next stage of venture capital financing is the early stage. At this point, your company should have begun operations, but you still may not be ready to manufacture or sell your product. The point of this financing stage is to increase your company's capabilities. Companies generally need a great deal of money during this financing stage.

The start-up stage comes next, and during this stage of financing, the money that you receive should be spent on refining the development of your product and preparing your initial marketing strategy. Most companies that receive start-up financing will have only been in business for a short time or have been recently organized. Companies may see revenue but have likely not yet been able to turn a profit.

During the first stage of financing, you will seek investment to help you begin commercial manufacturing and to sell your first products. Most companies that reach this stage of venture capital financing have been in business for three years or less.

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