Access to sufficient capital is always a business issue, from the start-up stage right through to the exit stage. But the reasons for the financing need – product research and development, market validation, operations, growth – and the typical sources of that financing vary depending on where the business is in its financing lifecycle. To help you get started or know what’s coming, here’s a summary of the five key stages of the financing lifecycle.
Stage 1 Concept Financing. In this beginning stage, the entrepreneur is developing and completing an initial validation of a business concept. Financial resources will be minimal, often consisting of self-funding or loans from friends and family members.
Stage 2 Seed Financing. At the seed stage, the start-up will have increased costs as the entrepreneur incorporates the business and devotes more time to validating the concept, defining the market and developing the product. Funding options at this stage typically include government grants and loans and investments from friends, family and close business associates, as well as “accredited” angel investors. Start-ups often attract angel investors by participating in a provincial small business investor tax credit program or raise funds through other equity-based funding options, like crowdfunding. To secure angel investments, the entrepreneur may have to give up some management oversight and control to the new investors. However, angel investors often provide more than just capital, contributing input and guidance about management and other aspects of running the business.
Stage 3 Launch Financing. When the start-up is ready to officially launch its product to market, it will need to ramp up spending to hire personnel and create relationships with partners, suppliers and customers – with little or no incoming revenue. At this stage, the start-up might begin looking for early stage venture capital funding (typically from venture capital funds or other institutional investors as opposed to individual investors) or financing through strategic investors while continuing to raise money from established angel investors. These types of investors spend more time on due diligence before investing, and to attract them, the entrepreneur will have to give up greater control over the business. In exchange, the entrepreneur will gain mentorship from experienced business people and access to a broader network of partners and investors and help implementing good corporate governance practices to give the business a leg up as it continues to grow.
Stage 4 Growth Financing. Once a product has been successfully accepted by the market, the business will be looking to grow and expand its reach. If the business’s revenue stream isn’t enough to support the targeted growth, it will need to raise more money. Larger venture capital funding, sometimes in multiple rounds (Series A, B, and so on), is common at this stage. The company might also use venture capital or angel investor funding at this stage to bridge to an exit transaction or a public offering.
Stage 5 Maturity/Exit Financing. Once the business has matured, additional financing options will become available for growth and expansion opportunities. For example, the company might decide to undertake an initial public offering (IPO) to raise money in the public markets and achieve liquidity for its investors or obtain bank debt financing that isn’t accessible to earlier stage companies. At this stage, the company might also move forward with an exit transaction through an acquisition by or a merger with another company.
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McInnes Cooper prepared this article for information; it is not legal advice. Consult McInnes Cooper before acting on it. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2016. All rights reserved.
About the author:
Julie Robinson is a lawyer with McInnes Cooper and a member of its Entrepreneurial Services, Corporate Securities & Finance and Corporate & Business and Teams. Julie regularly works with start-ups and investors on venture capital financings and acts for companies in relation to private placements and public offerings of securities, mergers and acquisitions and securities regulatory compliance matters. You can reach Julie at firstname.lastname@example.org.