Venture Capital Funding Startup Guide
From Seed Capital to Angel Investors to Venture Capital Funding - Startup Company Financing Model
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This article gives an overview of how a startup company goes from seed capital to angel investors to venture capital funding (Series A round) - the classic startup company financing model.
Seed capital / Seed round / Seed funding
Say, 3 people decide to start a business in biotechnology. They do so by incorporating a company limited by shares. They provide the initial capital. They are the only three shareholders. They are the founders of the company. The initial capital they provide is known as seed capital. The process of such injection of capital is known as a seed round or seed funding. The money is primarily used to cover preliminary expenses such as market research and product development (R&D).
Angel investors / Angel round
As time goes by, the company needs further funding. The 3 founders, though with unlimited passion for their business, have limited wealth. The company is likely to still be in its preliminary stages - not generating any revenue, or with limited sales and earnings - but looks for further growth. It is not attractive enough for venture capitalists yet. This is when angel investors come in. They bridge the gap between seed capital and venture capital.
Angel investors are individuals who invest in startup businesses that exhibit high growth prospects. They are usually wealthy entrepreneurs or business executives who look to invest in companies that have a synergy with their own businesses, or that have high growth potential in its industry. Since the company does not yet have a profits track record, the risk involved is very high.
Venture capital / Preferred stock financing / Series A round
Venture capitalists provide venture capital to startup, high growth businesses usually with a prospect of achieving an IPO within a number of years (e.g., 3-5 years). Venture capitalists generally invest in the form of funds that are privately held limited partnerships (LP).
A venture capital fund is a substantial pooled investment. Such fund may come from institutional investors such as pensions funds, endowment funds, insurance companies, foundations and corporations. Wealthy individuals may also participate in such fund. It is possible that there are more than one fund investing into a target company in a financing round.
Venture capitalists exit by IPO or trade sale.
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