Venture Capital Financing--Stages of Business Development

Seed Financing--A small amount of money is involved (usually $50,000 or less). Funds are used to develop a concept. This is the earliest stage of venture capital financing. The investor (often referred to as an angel) is expecting to reap a large percentage ownership should the concept prove to be feasible and marketable.

R&D Financing--This is a tax-advantaged partnership set up to finance product development. Investors secure tax write-offs for their investments. If the product becomes successful, they share in the profits.

Startup--Money is used for product development and initial marketing. While startup companies are organized, they typically have not yet sold their products commercially.

First Stage--The entrepreneur usually has developed a prototype. Funds are used to initiate full-scale manufacturing and sales.

Second Stage--In this stage, working capital is for the initial expansion of a company that is shipping products but may not yet be showing a profit.

Third Stage--This is also called "Mezzanine" financing. Capital at this stage is used for major expansion including physical plant expansion, marketing, and working capital.

Fourth Stage--This is also referred to as "bridge" financing. This is financing for a company expecting to go public within six months to a year. Often bridge financing is structured so that it can be repaid from the proceeds of a public underwriting.

Acquisition Financing--Funds are provided to a firm to finance its acquisition of another company.

Management LBO--Funds are provided to enable an operating management group to acquire a product line from either a public or private company concern, often the very company they work for. (LBO means leveraged buy-out.)

Public Market--This is the purchase of over-the-counter stock. The venture capital investor is typically directly involved with improving the company.

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