Venture Capital Investment Process | Marquee Equity

Venture capital funding (VC) is for all to know over the past few decades. The biggest venture capital firms pick the best ideas to finance entrepreneurs out of their piggy banks to get their venture capital returns on investments. Venture capital fundraising is attractive only if the business can have proof that its business model works, and will generate returns on venture capital investments. 

Stage 1: The Pre-Seed Stage 

The pre-seed stage is the earliest stage of the venture capital stages and refers to the very early days of a startup’s existence before it has developed a fully functional prototype or launched a product.

At this stage, the startup is usually in the idea generation phase and the time here is spent on researching and refining its business concept, conducting market research, finding a team, and developing a minimum viable product (MVP). Pre-seed funding is raised from friends and family, angel investors, or early-stage venture capital firms based on their venture capital investment criteria. Firms at this stage find it hard to come to a venture capital valuation to secure the deal and sign on the venture capital term sheet. Pre-seed funding rounds are often small and are typically used to cover the initial outlay of the business.

Stage 2: The Seed Stage

Seed stage funding is the second-earliest stage of the venture capital stages and is usually given to firms that are beyond the ideation phase or have already received venture capital fundraising at pre-seed. 

Seed-stage funding is provided by angels, firms that provide venture capital funding, or other early-stage investors who are looking to make an early profit-motivated investment. A venture capital term sheet would have to be signed at this point, after reaching a venture capital valuation. The funding can be used to offset expenses, such as product development, market research, hiring, etc. Venture capital deal flows usually almost start at this stage. Venture capital syndicates can also be interested at this point such as Patronus who have early-stage investments in their venture capital portfolio. Venture capital syndicates are a group of investors that pool their capital to invest in deals. 

Stage 3: Series A Stage

Seed Series A funding is investments made by venture capital firms wherein a startup wants to grow and expand its operations and develop its true market potential. Companies at this point in time have proved that their financial model works and have strong financials. In 2022, the median Series A funding totalled $15 million. Firms such as Sequoia Capital, Google Ventures, and Intel Capital all have Series A funding in their venture capital portfolios.

How to Get Series A Funding:

1. Accelerator – One-third of startups that raise Series A funding go through an accelerator.
2. Network – connecting with investors 
3. Build on your Network –maintaining and building on relationships with the people in your business environment

Stage 4: Series B Stage 

Series B funding is the second round of financing for a startup company in the venture capital investment process after it has already raised its initial seed round (Series A). At this stage, a venture capitalist’s due diligence might indicate more traction and growth potential in the future. Typically, Series B funding involves a larger investment from venture capital firms or institutional investors if it fits their venture capital investment criteria. Companies that successfully secure Series B funding are often considered to be more established, and are closer to achieving profitability. It’s also helpful to note that venture capital exits might also happen at this point from earlier-stage investors.

Stage 5: Series C And Beyond

Series C Funding is the next round of venture capital fundraising after Series B. Venture capital deal flows here including businesses that want to focus on scaling and growing more than ever. Big names such as Accel Partners, Goldman Sachs and Sequoia Capital carry out their venture capital due diligence carefully to further bolster their venture capital portfolios at this point. There could also be requests to invest at this point from investors because the startup has proven itself and sees more success down the line for itself. The average amounts in this stage are $30M to $100M. The latter stages beyond this point in the venture capital investment process include Series D, E, F & G. While possible, very few companies make it here. Some companies raise capital as a ‘way of doing business’ which runs the risk of being diluted more and more. Venture capital exits are made at this point as well from earlier investors because there’s a feeling that the business has tapped completely into its potential. The vital thing to understand here is that each series typically comes with new investors with different terms than previous rounds.

Stage 6: Mezzanine Financing

Mezzanine financing is a form of funding that involves a hybrid mix of debt and equity financing. It is used by companies looking to raise capital for expansion or other major projects. It’s considered a higher risk since one could lose their investment if the borrowing company goes bankrupt. This means that if the company fails, the mezzanine investors will not be able to recover their investment. However, mezzanine financing can be an attractive option for companies because it can provide them with funds without giving up too much ownership or control. Mezzanine financing is usually provided by a company’s main, long-term investors in the range of $5M to $100M.

Conclusion

Hopefully, now you’re equipped with the knowledge of all the stages of the venture capital investment process. Startups usually fail because, at some point, they run out of funds. Determining which stage you’re on, where you might be lacking financially, and taking an early call can save you and your business. If this feels too overwhelming, fret not! Just call Marquee Equity at +1-213-600-7272 to get step-by-step guidance on how to grow your business faster than ever before.