Venture Funding Definition
Venture funding is a funding process in which the venture funding companies manage the funds of the investors who want to invest in new businesses which have the potential for high growth in future. The venture capital funding firms provide the funds to start ups in exchange for the equity stake. Such a startup is generally one that possesses the ability to generate high returns. However, the risk for venture capitalists is high.
Venture Funding Stages
There are five stages of venture funding. They are as follows:
Stage 1: Seed Capital
In this first stage of venture funding, the venture or the startup company in need of the funds contacts the venture capital firm or the investor. The venture firm shall share its idea of business with the investors and convince them to invest in the project. The investor or venture capital firm shall then conduct research on the business idea and analyze its future potential. If the expected returns in future are good, the investor (Venture capitalist) shall invest in the business.
Stage 2: Startup Capital
Startup capital is the second stage of venture funding. If the venture is able to attract the investor, the idea of the business of the venture is brought into reality. A prototype product is developed and fully tested to know the actual potential of the product. Generally, a person from the venture capital firm takes a seat in the management of the business to monitor the operations regularly and keep a check that every activity is done as per the framed plan. If the idea of business meets the requirement of the investor and has sufficient market in the trail run, the investor agrees to participate in the future course of the business.
Stage 3: Early Stage / Second Stage Capital
After the startup capital stage comes the early/first/second stage capital. In this stage, the investor significantly increases the capital invested in the venture business. The capital increase is mainly towards increasing the production of goods, marketing or other expansion say building a network etc. The company with higher capital inflow moves towards profitability as it is able to reach a wide range of customers.
Stage 4: Expansion Stage
This is the fourth stage of venture funding. In this stage, the company expands its business by way of diversification and differentiation of its products. This is possible only if the company is earning good profits and revenue. To reach up to this stage the company needs to be operational for at least 2 to 3 years. The expansion gives the venture new wings to enter into untapped markets.
Stage 5: Bridge / Pre IPO Stage
This is the last stage of venture funding. When the company has developed substantial share in the market with its products, the company may opt for going public. One main reason for going public is that the investors can exit out of the company after earning profits for the risks they have taken all the years. The company mainly uses the amount received by way of IPO for various purposes like merger, elimination of competitors, research and development, etc.
Venture Funding Network Alliance
Venture Funding Network Alliance (VFNA) is a non-profit organization which is engaged in arranging funds for small business enterprises. VFNA is partnership among various non-profit organizations, big companies, and government agencies. The alliance is formed to fasten the growth rate of businesses and strengthen the linking chain between the vendor, investor and contractors. It brings together all the ventures, investors, advisors, other financial resource providers, etc. at the same place to help the diverse business enterprise. VFNA solves the major problem faced by the ventures like lack of capital access and other financial services.
Venture Funding Rounds
Venture Funding Rounds is phased capital inflow into the business by the investors. The investors are always eager to invest in the business which gives higher returns and have future growth potential. Based on the maturity levels of the business, investors invest the money. The fund rounding is divided into various phases which are seed funding, series A, B and C. Let us understand the terms in brief:
This is the initial stage, where the startup needs the funds to conduct research and development of the product. The interested investors provide the capital to the company after conducting the feasibility study. With the seed capital, the company develops the product for the target audience.
Series A funding round is the phase when the company offers its ownership stake in form of stock to the external investor in return of funds. The investors invest money after checking the progress made with the seed capital, market share the company can capture, the quality of team and risk associated. Series A financing major motive is to conduct market research and development along with the decision for a full fledged launch of the product into the market.
Series B funding phase is done to fight the competition in the market, to improve the economies of scale, to increase the market share, etc. The investment is made after checking the performance of the company and future potential based on industry growth. The main aim of the company is to earn good profits with the funds invested in this phase.
Series C is the last round of venture funding phase. In this stage, the investors invest the money if the company has achieved success and its future prospects are bright. The funds are used by the company for increasing the market share, mergers and acquisitions introduce new products into the market, etc.
Venture Funding is an important source of financing the new startups which have new ideas. Venture funding provides support to those startups and new ideas which otherwise would have gone into waste. It helps the growth of companies which have huge potential and revenue generating ability. Without venture funding companies many innovative products which we use in our lives might not have come into existence. Hence, the venture funding acts as a backbone for new ventures.1–3