First, a short definition of venture capital is needed. Venture Capital is money invested by a funding partner to a new, growing or troubled business. The decision to invest is taken knowing the risks involved, but also the potential future profits.
There are several types of venture capital, classified based on the stage of the business seeking for investment. The three main types of working capital are early-stage funding, growth funding, and acquisition/buyout funding.
After six stages of financing being completed, one can consider the venture capital funding procedure is completed.
These stages are:
- Seed Money
If you do not have a product or a company yet, but you are just starting out, then you are looking for low-level financing. Investment capital at this stage may be used for market reasearch, fructifying an idea, making a sample product. Few VC funds decide to invest seed money and usually it is not a large amount.
Companies that have developed products or services can get start-up financing. They can use the money to finish product development and meet marketing expenses.
Usually granted to companies after 2 or 3 years of existence, this type of financing is used to increase sales, improve productivity, take their activities to full business scale.
If you have sales, but no profits or have just break even, this is the stage your company is in. So what you will get is this operational capital.
Also known as mezzanine capital, this type of investment will help expand into new markets or increase your marketing activity.
Alson termed ”bridge financing”, the money is used for ”going public”. You have to know there are venture capital funds that focus their efforts on the end of business spectrum – mezzanine and bridge financing. They specialize in initial public offerings (IPOs), buyouts or recapitalizations.
While Early Stage Financing comprises seed money, start-up and first round financing, Expansion Financing is subdivided into second stage financing, third stage funding and bridge financing. Acquisition or Buyout financing sustains a company to acquire certain parts, products or an entire company.
To sum up and turn the theory in practice, we chose two famous examples of venture capital funded companies.
Whatsapp is one VC-backed company that revolutionized the Venture Capital world. In 2014, Facebook acquired Whatsapp in a $22 billion deal. This was one of the biggest private acquisition of a venture capital funded company. Before Facebook, Whatsapp was supported by one lucky venture investor – Sequoia Capital. Sequoia’s initial investment was $60M. The profit: $3B.
Alibaba started as a discussion between a Chinese internet entrepreneur, Jack Ma, and Masayoshi Son, SoftBank’s founder, back in 1999. Japanese telecom SoftBank had invested $20M for 34% of Alibaba and in 2014 Softbank’s stake was valued at over $60B.