Venture Capital – The Early Stages of a Startup
During the early stages of a startup, marketing and product development funds are necessary for the success of the business. The VCs enter the picture with a first investment round, or series A round. The Series A round can be viewed as the first institutional investment round in a company. Subsequent investment rounds are called Series B and Series C rounds. The second round is considered working capital and provides funds to companies that are not yet profitable. The third and final stage is called expansion financing, and it is used for companies that are now making money.
The first major fundraising round for the venture capital industry took place in 1978, when the US Labor Department relaxed restrictions on the “prudent man” rule. As a result, a diverse group of investors entered the venture capital industry. Today, major funds, including private equity firms, sovereign funds, and hedge funds have joined the ranks of venture capitalists seeking return multiples in a low interest environment. Although the amount of investment differs from firm to firm, the industry has changed considerably in the past three decades.
The early venture capitalists are responsible for the development of the computer industry. While they were portrayed as cowboys, today’s VCs have a much more sophisticated approach and are more like bankers and M.B.A.s. Despite the early success of the industry, venture capitalists must meet strict criteria to receive funds. The goal is to give the entrepreneur the best chance at success. In addition, these investors must have the necessary resources to run the company.
During the early stages, venture capitalists typically provide seed funding to companies. These investors are responsible for the growth of the company during its initial expansion phase. Later, when the company has already begun to grow, VCs typically fund Series A and Series B funding rounds. Late stage funding is largely handled by private equity or hedge funds. The first two rounds of funding provide the most support for new companies, while later stages are dominated by angel investors.
While early stage investments may seem like a risky investment, the initial funding round is essential for a company to get off the ground. During this phase, the VC will evaluate the company’s financial condition and determine whether it is ready for a Series A or Series B funding. The investor’s personal goals and time frame for success will drive the decisions made. During the latter stages, the limited partners will be primarily institutional investors.
While early stage investment rounds are crucial for the growth of a business, later stages tend to be more lucrative. While early stage investors focus on the company’s potential, VCs also consider their investors’ skills and experience. Many VCs will join a company’s board as an official board member or advisor, which allows them to play an active role in the company’s management. A VC will help the founder’s business grow by providing critical expertise and capital.