Is your business looking for external investment? With the volume of different funding types available, it’s important to consider which option is most appropriate for your business. Below, we explore the main types of funding and consider who is most likely to provide your business with such funding.
Importantly, some venture capitalists may only provide one type of funding. So, a key consideration for venture capitalists when looking at potential investments is the risk versus the potential return. The earlier in the life cycle of the business that a venture capitalist invests, the greater the risks involved and the longer the period until exit. Accordingly, a venture capitalist will expect a higher return for investing at an early stage as opposed to a later stage.
1. Seed Funds
If your business has just set up and you have no viable product yet, this would be the most appropriate type of funding for you. The amount of seed capital you raise is typically small, and it is used to finalise establishing the business, creating a product prototype or paying for market research. Not many venture capitalists provide seed capital. Therefore, you may need to look to friends and family and/or angel investors who may be interested in investing in your business at this stage.
2. Startup Funds
If your business has been set up, has a product prototype and has at least one full-time employee, you would be looking for startup capital. Startup capital is used to take on additional key people, fund further market research or finalise your product ready for launch. Again, few venture capitalists provide startup capital so you will likely have to approach friends and family and/or angel investors.
3. Early Stage Funds
Once you have been operating the business for two to three years, have a management team in place and sales are increasing, you might look to raise some early stage funding. Early stage funds are used to increase further sales (in the hope of breaking even) and increase productivity and efficiencies within the company.
Venture capitalists are more likely to become involved at this stage, and if you are looking for investment from a venture capitalist, you should do some research into which ones may be interested in investing in your particular business before approaching them.
4. Expansion Funds
Well-established businesses looking to get to the next level might want to seek expansion funds. These may be used to help you enter new markets or increase marketing efforts. When looking for expansion funds, you should approach venture capitalists that specialise in later stage investing.
5. Late Stage Funds
Once your business is profitable and you have a second level of management in place, you would be looking for late-stage funds.
Late-stage funding may be used to develop or launch a new product or to support a significant business expansion. Again, venture capitalists provide this type of funding due to the amount required.
When looking for different types of funding, consider what stage the business is at and who is most appropriate to approach. If you decide to approach venture capitalists, do your research into which ones specialise in the type of funding you require and, of these, which might take a particular interest in your business. If you have any questions, get in touch with our startup lawyers who specialise in capital raising on 1300 544 755.
Working on a startup? Download LegalVision’s Startup Manual – a free 60-page manual featuring 10 case studies and tips and tricks from Australia’s leading VCs and startups.