The Venture Adventure

0



When it comes to venture capital investing, is earlier better? Here’s a look at the various stages and rounds of investing.


Company Development Stages:


-Startup:

The initial research and development stage, when company has a concept or product under development. Usually little or no revenue coming in.


– Early:

Company has product in pilot production or has just begun selling product or service. Revenues small.


-Expansion:

Company’s product/service has begun hitting the market and revenues are growing. But company needs funds to reach next stage of growth or enter broader market.


-Later:

Company’s product/service is widely available and likely to be generating positive cash flow. Company looking to reconfigure in anticipation of selling to strategic buyer, private equity group or to go public.

Rounds of Investing:


-Seed:

Investment in company before there is a real product or company organized. May take place of investments by friends, family or angel investors. Seed investments are typically small under $2 million and require the entrepreneur to give up a large equity stake. Less common than other rounds.


-Series A:

Initial investment in start-up or early stage company. Usually a commitment of $1 million to $5 million in exchange for hefty stake in company, perhaps exceeding 50 percent. Sometimes this commitment comes in sequential amounts called tranches, with company having to meet benchmarks to get remaining funds. The investor stake is in the form of series “A” Preferred Stock. One of the riskiest forms of venture investing, but payoff is potentially high. Venture capital firms look for at least three times this initial investment value when exiting.


-Series B:

Second round of investment in company, usually in early or expansion stage. With marketable product, less risky investment than series A, but still considerable risk. Percentage stake for venture capital investor usually smaller, in the 20 percent range.


-Series C

or above: Later rounds of investment in company. Commitments usually larger, often exceeding $10 million. But less risk, since company has demonstrated solid revenue growth. Stakes for venture capital investors smaller, often under 10 percent. But potential for large payouts in relatively short time frame as company is near the stage where ready to sell or go public and create an “exit,” or “liquidity event” for investors.


-Mezzanine:

Term usually applied to the final round of venture capital funding before the company is ready to file for an initial public offering. Financing is usually structured to be repaid through proceeds of the public offering, often within months of an investment.


Howard Fine


Sources: PricewaterhouseCoopers/National Venture Capital

Association Money Tree Report; Fundingpost.com

Venture Capital Glossary.

Previous article Movers and Losers
Next article PS Business Parks Reports Tepid Earnings
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

No posts to display