An e-book exploring the differences between private equity and venture capital along with steps VC-backed firms can take to be funding ready at all times.
Most start-up businesses need capital in order to grow
Capital comes in two main forms: debt and equity. Debt is money that’s borrowed from a lender or raised from a bond issuance that must be repaid with interest. Meanwhile, there are two different kinds of equity: private equity (PE) and venture capital (VC).
PE and VC investors have different objectives. Private equity investors want to invest in businesses that are profitable, while venture capital investors want to invest in businesses that are going to grow. There’s a big difference between the two.
“But doesn’t every business want to be profitable?” you might be thinking? Yes, but profitability isn’t always the main objective, especially during the early stages of a startup company.
Technology giants like Amazon and Google are good examples of companies that operated at a loss for years so they could invest all of their cash back into the business in order to grow.
These companies and their investors were taking the long view: They weren’t worried about becoming profitable right out of the gate. Instead,they wanted to grow as much and as fast as possible so they could eventually dominate their industries. They knew that if they could become the dominant online retailer and search engine, profits would soon follow. Of course, this strategy worked well for both of them.
Also, market capitalization — which is a main focus for VC investors — is calculated as a multiple of revenue, not earnings. So, the faster a company grows, the higher its sales and market cap will be.
Stages of Venture Capital Financing
Venture capital is usually raised in stages because successful growth companies always need more money to keep growing. Think of it like pouring gasoline on a fire: The more capital a business has, the more salespeople it can hire and the more it can invest in technology, research and development, and new product development to spur growth.
The first stage is called the pre-seed stage
Here, there may not even be a real business yet — it might just still be an idea or concept in an entrepreneur’s mind. Funding at this stage usually comes mainly from family and friends or out of an entrepreneur’s own pocket, not from venture capital investors.
The next stage, or the seed stage, is the first stage where venture capitalists might cet involved. There still might not be a lot of revenue but there’s strong evidence that the seeds of a successful business
have been planted. Real (not prototype) products and services are being delivered to the marketplace and a management team is in place that’s capable of executing the business plan.
The next stage of funding is called Series A
At this stage, VC investors want to see a real, Operating business with repeatable sales and marketing processes that can acquire customers on a consistent basis. The business should be utilizing financial modeling and long-range planning and have adequate internal controls, along with a fundraising project plan and investor presentation.
Series B, Series C and so forth
The subsequent funding stages after Series are called B, C, Venture capital investors will have specific expectations at each funding stage.