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 first. Typically, a company would be short on capital when considering private investors. However, there are multiple sources of social capital, including friends and family, business angels, venture capital investors, corporate/strategic investors, private equity firms, or the entrepreneur’s own capital.
For those looking for $500k+ capital, look into VC. For smaller investments, entrepreneurs should look to Business Angel or Debt Capital. So it’s helpful to understand the different types of funding stages, so check below.
Pre-seed financing is the financing that is needed before physically building the business. Usually, this funding goes towards putting together a good business plan that can impress potential investors.
Seed funding is the funding that is required to start building the business. Some businesses may be able to skip this funding phase, if applicable, but seed capital is typically the capital that is required to get the building blocks for a start-up. Typically, in the early stage, a business is not yet ready to open its doors and this funding is typically used to rent office space, real estate, equipment needed to produce the business product or service.
Seed funding is less commonly invested by VCs and is not necessarily a large amount of funding. Seed funding can range from $100,000 to $500,000. It rarely exceeds a million dollars. Seed capital can also be obtained from a Business Angel, Friends and Family or from the Entrepreneur’s own funds. Only 15-25% of venture capitalists invest in seed funding.
Early stage financing is often where venture capital is sought. Typically, a business is ready to go, 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 for entrepreneurs to obtain seed capital to get started. These conventional ways include raising debt capital from a commercial lender, commercial bank, or angel investor who is willing to put seed capital into the business. Other, more resourceful entrepreneurs raise start-up capital by raising debt capital, sweat capital, and funding from friends and family. Venture capital is typically generated with early-stage financing, that is, as noted 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 taken seriously.
