November 27, 2014

Startup Stages of Growth and Venture Capital

venture capital continuumToday, high-growth startups seeking outside funding sources such as venture capital and angel capital, are unlikely to get millions of dollars in funding right out of the gate.

For instance, if your company is 3 weeks old and you have zero customers and your product offering is still being developed, don’t expect someone to hand you $10 Million for your first funding.

Instead, your startup has to prove itself in steps. You start by seeking a small-ish investment. At each step along the way — assuming your startup has proven itself and makes it to the next step — you seek larger sums.

Getting outside equity funding becomes a continuum of activity often spanning several years. High-growth startups may go out for new rounds of funding multiple times. It tends not to be a one-time event.

You also will find that the growth stage your startup is in, dictates where you go to seek funding. Funding sources specialize in certain growth stages. Angel investors provide funding early on. Some venture capital firms focus on early stage and others on later stages. In some communities there are even non-profit venture organizations funded by the state or local region that provide seed money to very early stage businesses.

I read an interesting report this weekend that has an easy-to-understand breakdown of the growth stages that startups go through, and the funding appropriate for each stage. The report calls it “the venture capital continuum”:

Venture economies require a robust and comprehensive capital continuum to fuel the development of innovations into companies. The life of high-growth ventures can be broken into four stages of investments along the venture capital continuum: seed, early-stage investments, growth equity and exits.

The first two stages of the continuum tend to be provided by regional capital sources:

  • Seed investments and funding is typically $250,000-$1 million and provided by friends & families of the entrepreneur, nonprofit venture development groups, and grant funding sources. The company is focused typically on building or testing its offering and assessing early customer interest in that offering.
  • Early-stage investments are typically $1-5 million and is usually provided by regional venture capital firms or angel investors. At this stage, the company is focused on producing a commercial offering, validating it with initial customer sales and developing a broader industry advisor network.

Companies that continue to prosper will typically find the next two stages of capital from national capital providers as well as strategic industry partners:

  • Growth financing spans a range from as low as $5 million to more than $50 million for companies. The funds are provided by a range of equity sources, regional and national, as well as strategic investors and mezzanine/debt capital sources. Companies at this stage are focused on accelerating market adoption of their offerings and scaling infrastructure to support their continued growth.
  • Exits are the final stage of investment in venture opportunities, and typically involve some element of return of capital to the original venture backers and management teams. At this stage, strategic acquirers typically take on enterprises and provide the resources necessary for widely distributing the offering.

As companies grow through these stages of development, they must attract strategic financial partners that can provide increasing amounts of capital and wider industry networks to support that growth, in the same manner that companies develop operating infrastructure and systems to position that the firm for sustainable success.

The report is co-authored by a local technology economic development organization on whose Board I serve, called NorTech. While the report is about my local area in Ohio, it will be of interest to anyone who wants to understand the different stages of growth of startups and trends in funding for each.

Download the venture capital report here (PDF). Pages 5, 8, 10, 12 and 14 are particularly applicable to this discussion.

As an aside I see that Embrace Pet Insurance, the company of Laura Bennett who is one of our small business experts here at Small Business Trends, is one of the companies listed in the report as having received seed venture money. Sharing her expertise is one of the no-cost ways Laura has attracted PR visibility for her startup company.

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Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

5 Reactions

  1. Anita, we received seed money from Jumpstart, a venture development organization here in Cleveland, plus 7 other angels, mainly located in the area. This allowed us to get up and running, which is a huge step.

    Now that we’ve been selling policies and have some traction, we are raising a VC round and looking locally and mainly in Chicago. We’ve been networking on this though for 4 years so we’re getting a good reception so far. Fingers crossed!

    Laura

  2. Excellent article, especially for the newbie! Thank you.

    I’ve linked to you, in fact, from an article I am publishing regarding start-up stages, and the pros and cons from the perspective of someone seeking employment.

  3. Thank you for this.

    I was quite confused about what seed fund and venture capital finances were. Just figured out that it is related to what stage a startup is. Seed funds to jumpstart the project, and venture capital finances and other strategic alliances to further develop a working and most probably, a profitable idea.

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