What are the stages of a company in the food chain?
Discussions About The Food Chain Of Entrepreneurs
Not all venture capitalists invest in start-ups and early-stage ventures. Venture capital firms have different preferences and practices, including how much money they will provide, where in the entrepreneurial life cycle they prefer to invest, and the cost of capital or expected annual rate of return they are seeking. The sources of capital change dramatically for entrepreneurs at different stages of development and rates of growth.
According to Dan Bassett, a partner at InnoCal Partners based in Costa Mesa, California, “The number one piece of advice for entrepreneurs is to know where you are on the food chain. If you don’t know, seek advice and make use of the very high quality people in your environment.”
Stage Definitions used in the Venture Capital Industry
The five stages in the food chain of the venture capital industry are described in more detail below.
1. Seed-Stage Financing. The venture is in the gestation, or idea formation stage, as the product is not fully developed. A relatively small amount of capital is usually provided to an inventor or entrepreneur to prove a concept. This may involve product development and pre-marketing activities like market research, as well as building a venture team and completing a business plan.
2. Early Stage Financing. Early Stage or Start-Up Financing is used for completing product development and may include initial marketing efforts. Ventures eligible for this type of financing may be in the process of organizing, or they may already be in business for two years or less, but have not sold their product commercially. Investors want to see entrepreneurs that have conducted market studies, assembled the key players on their venture team, developed a business plan, and are ready to launch. Once launched, this opens the door to institutional investors, as the networking capabilities of the venture capitalists are used more here than in more advanced stages.
3. Development and Expansion-Stage Financing. Ventures here are usually more than three years old, demonstrating significant growth in revenues, and may or may not be showing a profit. Some of the uses of capital may include expansion of production capabilities, marketing, new product development, or developing new markets for the existing product line. The venture capitalists’ role in this stage evolves from a supportive role to a more strategic role, often bringing in more institutional investors along with initial investors from previous rounds.
4. Later-Stage and Bridge Financing. Investors provide capital for ventures in this stage that have reached a fairly stable growth rate and have either stable streams of profitable earnings, or highly predictable streams of top line revenues. VCs will provide bridge financing when a venture plans to go public within a year or so. This can be structured so that it gets repaid from the proceeds of a public underwriting. It can also involve the restructuring of major stockholders/early investors who want to reduce or liquidate their positions, or if management has changed and the stockholdings of the former management, their relative and associates are being bought out.
5. Acquisition and Leverage Buyout Financing. Investors provide funds to finance the acquisition of another private venture or public company. This includes money for mezzanine financing using subordinated debt, and bridge loans which are used to finance Leveraged Buyouts (LBOs), and recapitalizations. Financing for a Management Buyout (MBO) enables a group to acquire a product line or business, at any stage of development, from either a public company or a closely-held private venture. An MBO usually involves the revitalization, or a “turnaround” of an operation, where an entrepreneurial management team acquires a significant equity interest in exchange for improving the venture’s performance.