When is the right time to consider VC or Private Equity for your enterprise? Initially every entrepreneur needs to first see if they have exhausted all other options first. Typically, a company would be low on equity when considering private investors. There are however multiple sources of equity capital, including, Friends & Family, Business Angels, VC’s, Corporate/Strategic Investors, Private Equity companies or The Entrepreneur’s own capital.
For those seeking capital of $500k+ look for VC. For smaller investments, entrepreneurs should seek a Business Angel or Debt Capital. An understanding of the different types of funding stages is therefore useful so see below.
Pre-seed funding is funding that is needed prior to physically construct the enterprise. Usually this funding goes to putting together a good business plan that can impress potential investors.
Seed funding is funding that is required to start building the company. It is possible that some companies could if appropriate skip this funding phase, but seed capital is usually the capital that is required to get the basics for a start-up. Usually at seed stage, a company is not yet ready to open for business, and this funding is usually used to rent office space, real estate, equipment needed to produce the company’s product or service
Seed funding is less commonly invested by VC’s and is not necessarily a large amount of funding. Seed funding can range from $100k-$500k. Rarely does it exceed $1m. Seed capital can also be raised from a Business Angel, Friends and Family or the Entrepreneur’s own funds. Only 15% to 25% of VC’s invest in seed funding.
Early stage funding is usually where VC is sought. A company is usually ready to trade but requires additional capital for salaries.
Later stage funding is also known as expansion/growth stage funding is for companies who are doing well and are seeking to expand.
There are numerous ways that entrepreneurs raise seed capital to get started. These conventional ways include raising debt capital from a business lender, merchant bank or angel investor who are willing to invest seed capital into the business. Other more ingenious entrepreneurs raise seed capital through raising debt capital, sweat equity and funding from friends and family. VC is usually raised with early stage funding, i.e. as above, series A or series B funding. In most cases, VC’s will not invest less than $1 million in a company.
Understand these and you will be off to a good start and be taken seriously.