When is the right time to consider VC or Private Equity for your company? Initially, all entrepreneurs must first see if they have exhausted all other options. Typically, a company would be low on capital when considering private investors. However, there are multiple sources of equity capital, including Friends & Family, Business Angels, VC’s, Corporate / Strategic Investors, Private Equity, or The Entrepreneur’s equity.
For those looking for $ 500k + capital look for VC. For smaller investments, entrepreneurs should look for a Business Angel or Debt Capital. Therefore, it is helpful to understand the different types of funding stages; see below.
Pre-seed financing is the financing that is needed before the business is physically built. Typically, this funding goes towards putting together a good business plan that can impress potential investors.
Start-up financing is the financing necessary to start building the business. Some companies, if applicable, may skip this funding phase, but start-up capital is usually the capital required to obtain the basics for start-up. Typically, in the early stage, a business is not yet ready to open its doors, and typically this financing is used to rent office space, real estate, and equipment needed to produce the business’s product or service.
Venture capitalists invest less often in seed funding and it is not necessarily a large amount of funding. Initial financing can range from $ 100,000 to $ 500,000. It rarely exceeds $ 1 million. Seed capital can also be obtained from a Business Angel, Friends and Family or from the Entrepreneur’s own funds. Only 15% to 25% of venture capitalists invest in seed funding.
Funding is generally sought in the early stage. Usually a business is ready to trade, but requires additional capital for wages.
Later stage financing is also known as expansion / growth stage financing and is for companies that are doing well and looking to expand.
There are numerous ways that entrepreneurs obtain seed capital to get started. These conventional ways include obtaining debt capital from a commercial lender, a commercial bank, or an angel investor who is willing to invest seed capital in the business. Other more resourceful entrepreneurs raise seed capital by raising debt capital, working capital, and funding from friends and family. Venture capital is generally raised with early stage financing, that is, as mentioned above, Series A or Series B financing. In most cases, venture capitalists will not invest less than $ 1 million. in a company.
Understand this and you will be off to a good start and be taken seriously.