The definition of funding is the act of providing capital to help finance a project, endeavor, or enterprise. In VC funding there are three basic parts:
Fintalent’s funding consultants agree that funding may take the following forms:
- Investors make money in some way. These investors provide money in exchange for equity in a company – meaning they get to participate in any profits that might be generated from the company and use their shares as collateral if needed (e.g., if the company goes public). The more risk an investor takes on, the more shares they can have as part of their compensation package; however, it also makes them more vulnerable to potentially losing all of their invested funds if things don’t work out so well for the company’s bottom line
- The company takes the money and uses it to cover costs (e.g. software development, hiring more staff to grow the business). There are also fees associated with raising money for a company – these include legal fees, accounting fees, investment banking fees, etc. These costs can be split up in numerous ways between the investors and the companies but in general come out of the capital being invested by the investors.
Types of VC Funding
Traditional VC
Traditional venture capital is for companies that have proven there is a demand for their product and that the market will support it. Traditional VC firms provide capital to help sustain the company and expand the business beyond its initial launch. For example, if you own a company that sells products online but are growing quickly, a traditional VC funding could be used to help you grow your business as well as fuel your expansion into new markets.
Expectation: As an investor in a traditional venture capital, expect these firms to focus on commercial viability and market size rather than creativity or innovation. At the same time, traditional VC firms could be interested in your strong financials, a proven business model (or presentations of ideas), and a proven management team. Think about why you are seeking funding as an entrepreneur: you may want to build a company that will help solve a problem for society or you might want to bring innovation to the marketplace.
The traditional VC investment process:
– In-depth due diligence analysis is conducted on both you and the business to determine its worthiness.
– The firm makes a decision on whether they will invest or not.
– You then provide the requested capital. On average, it takes around three years from start-up to profitable launch before they can go public with their company.
If you decide to seek traditional VC funding, do your homework. Find a firm that invests in your field and that has a good track record with other companies that are similar to yours.
In the end, it’s in the best interest of the company to show growth with each year. Traditional VC firms look for this growth as well as its potential for exponential future growth.
Later-Stage Venture Capital:
The second type of venture capital is later-stage venture capital (also referred to as ‘growth capital’). This type of funding is typically used by larger companies that have shown steady growth over time and have stabilized their business model.
Expectation: With a focus on growth, these firms make investments in existing companies. They provide capital to help the company make strategic acquisitions, reach new markets, or develop new products and services.
The later-stage venture capital investment process:
– In-depth due diligence analysis is conducted on both you and the business to determine its worthiness.
– The firm makes a decision on whether they will invest or not.
– You then provide the requested capital. Later-stage VC firms are looking for companies that have strong financials and a proven management team.
- Venture Capital: A venture capital investment is a form of equity financing in which the investor purchases part ownership of a company in exchange for capital and professional guidance.
The purpose being to help small companies, seeking to develop new technologies, and needing money to commercialize their ideas. - Bridge Financing: Bridge financing may be appropriate for business owners who have an existing but underperforming business when they need money immediately to pay their business expenses, but requiring some restructuring before they can obtain debt financing or investors.
- Small Business Administration (SBA) Loan: The SBA, which has the mission of encouraging entrepreneurship and financial stability in the U.S. economy, offers its guarantees to banks, which in turn provide loans to small businesses.
- Asset-Based Lending: Asset-based lenders offer working capital loans based on the value of assets you already own. An asset-based loan can provide you with access to capital when your operating business is unable or unwilling to use its future earnings or assets as collateral for a loan.
- Leasing: Leasing is used by businesses of all sizes and by consumers as well. A lease is an arrangement between a property owner (lessor) and somebody who leases the property (lessee).
- General Release of Liability (GROL): A general release of liability is a release from all personal liability in the event of an accident or product liability lawsuit. It is a signed, written document by the parties that confirms that they have voluntarily given up their right to sue one another in connection with the accident or injury caused by the goods, services, and product.
- Debt Acceleration: Loan officers may also be willing to negotiate debt acceleration if you are pursuing credit immediately after bankruptcy.
- Forbearance: Forbearance is a temporary postponement of debt payments, usually for a short period. During this time, creditors agree to postpone any action to collect on the debt.
