“Start-up” Stage or First Round Financings

            These are the most difficult situations to finance because few people are willing to believe in an idea.  The fact is that not many new ideas have the potential to make money.  It is especially hard to communicate a new money-making idea to a venture capitalist because he is constantly bombarded with ideas—some of them good, some ludicrous.  Rather than obtaining funds from a venture capitalist, you may have to beg, borrow and steal from friends and relatives in order to obtain the initial seed money to get your idea off the ground.  Remember, a start-up is only an idea with no prototype product.  It usually takes two to three years before the company attains a cash flow break-even point.  Anyone investing in a start-up is taking a huge risk and will be looking for a tremendous reward.  In recent years more venture capital companies have been making more investments in start-ups.  About one-third of venture investments are now start-ups, whereas only a few years ago the figure was 10 percent.  There is a good chance that your start-up can be financed by a venture capital company.

Development Stage or Second Round

            Once you have proved the idea can work by means of a prototype, an economic study, marketing analysis, or some other means, you are in a position to have a good shot at obtaining financing from the venture capital community.  However, your selling ability still needs to be extremely sharp in order to convince people that the idea that works in a prototype can be brought to the marketplace at a profit.  By this time, your company is usually one to two years away from cash flow break-even.  As a result, the venture capital company will want a considerable return on its investment for taking a high risk.  After all, some companies never reach cash flow break-even after this stage of their development.

Expansion Stage or Third Round

            At this stage of development, the company has created a product or service and is marketing it with some degree of success.  The company needs additional funds to finance expansion of the business.  In most of these cases venture capital is abundant.  The entrepreneur will be ia  good negotiating position to obtain the best price from the venture capital community.  A company in the expansion stage is usually near the break-even point or perhaps no more than one year away from breaking even.  You will not have to give up as much of the equity in your company if your venture has reached this stage in its life cycle.

  Growth Stage or Fourth Round

            When the company is running well and is generating profit but needs additional capital in order to continue its strong growth, you will have the venture capital community eating out of your hands as long as you do not structure the deal so that they cannot make any money.  A company at this stage of development is beyond breaking even and is making money.  It needs money to grow quickly.  Strong profits are just around the corner.  In this situation, you may have to give up only a small amount of equity unless you are raising a large sum of money.  You may consider “going public” at this stage.