The funding profile, i.e. the amount, application and the period for which money is required, of every business depends on its stage of growth and development. Every stage has its own need for funds which determines the amount, length of investment and the associated risk and reward. Stages Of Investment The venture in this stage is on the "drawing board". It does not have a track record and it is in fact unclear whether the idea will in fact become a business. The product is usually still under development and the company is concentrating on producing a working model or prototype . Most of the funding at this stage comes from the founder's personal funds and from family and friends who believe in the idea. VCs and Angels are approached once the initial corpus is exhausted. Money is required for activities like research and development of a product or a business concept, test marketing of a prototype, etc. A relatively, small amount of capital is provided to an investor or entrepreneur, usually to prove a concept. It may involve product development, but rarely involves initial marketing. Amount of funding is usually between US$ 50 K to US$ 500 K. Likely Period of Investment is 5- 7 years. Risk is exceptionally high. The idea is untested and money is being used to develop it fully to a point where its commercial viability can be accurately assessed. The VC will look for the passion the entrepreneur has for the idea and would only finance the project when it is sure that the entrepreneur has used up his finances before completing the research. It is likely that at this stage the VC also uses debt financing along with equity investment. Returns expected by VCs are 100 % per annum. The company in the start-up stage may be in the process of set up or may have been in business for a short while, and services are being made ready for the market or are ready to be offered in the market. The funding is usually provided by "Angel Investors". This phase of the business may last from less than a year to several years depending on the industry variables. Money is required for the financing of product development, acquisition of land and building, and creating the necessary infrastructure for the business. Amount of funding is usually between US$ 50 K to US$ 1 million. Likely period of investment is 3 -7 years. Risk is very high. It is not known whether the products and services are going to be received well by its target market. Also, most start-ups require additional rounds of funding before the VC finally exits and makes his profit through capital gains. The venture will also need support from the VC in strategic management of the company. Returns expected by VCs are 60 – 80% % per annum. The products and services are fully developed and are being marketed in this stage. The company may have little or no revenues and it is likely to have be in existence for a short time (1-2 years). Money is required for marketing the products and services, manufacturing, and creating effective delivery processes in the company. Amount of funding is usually between US$ 500 K to US$ 15 million. Likely period of investment is 3-7 years. Risk is high. Returns expected by VCs are 40 to 70 % per annum. Products & revenues established. The company has been in business for 2-3 years. It has demonstrated product potential, a proven management team, and rapid business system development. Money is required for working capital for the initial expansion of the company. The company in this stage is producing and shipping its products but may not be showing a profit. The company is likely to have good prospects and a healthy order book. The money is spent on creating delivery processes and achieving customer satisfaction. This requirement for working capital is likely to increase as the business continues to grow. Amount of funding is usually between US$ 2 million to US$ 15 million. Likely period of investment is 3 - 5 years. Risk is medium to high . Returns expected by VCs are 30 to 60 % per annum. The company is established, in business for 2/3 or more years and poised for rapid growth.. The sales are on the increase and the company is breaking even or profitable. This stage is also called the Development Stage as the business is in the process of development and growth. The financing in this stage may also take the form of "Bridge Finance" or "Mezzanine Finance", which is funding provided to a company expecting to go public within the next 3 to 12 months. The reasons for going in for an additional round of financing so close to an IPO for raising money from the public, is to improve the balance sheet, to improve market perception about the company and to have a safety net in case the IPO is delayed beyond the planned date for any reason. Money is required for the rapid expansion of the company. Investments are made by the company in making a quantum jump in operations and to have the ability to reach critical mass. New strategic initiatives require immediate investment while the returns from them are expected over a longer time horizon. The money is spent on creating more marketing outlets and delivery centres, adding workforce, and setting up systems and processes to accommodate the expected growth of business and increased working capital requirements. Amount of funding is usually between US$ 2 million to US$ 20 million. Likely period of investment is 3 - 5 years. Risk is medium to high. Returns expected by VCs are 30 to 50 % per annum. The company is established, profitable, in business for at least 3 years. There is stabilization of competition, development of sophisticated business systems and increasing concentration of cost economies. Financing is provided by VCs for mergers and acquisitions, MBOs (Management Buy-Out) and MBI (Management Buy-In). Money is required for achieving growth through mergers and acquisitions, MBOs (Management Buy-Out) and MBI (Management Buy-In). Amount of funding is usually between US$ 5 million to US$ 50 million. Likely period of investment is 1 - 4 years. Risk is medium to high. Returns expected by VCs are 25 to 40 % per annum. The company is established, has been in business at least 3 years but is either not profitable or it is marginally profitable. Money is required for re-organization of business, to give it time to recover from an unprofitable and negative cash flow situation. The money is typically used to reduce the debt burden of banks and financial institutions, settle unpaid liabilities, and to buy out existing entrepreneurs, management and venture investments. Amount of funding is usually between US$ 10 million to US$ 50 million and above. Likely period of investment is 3 - 5 years. Risk is medium to high. Returns expected by VCs are 30 to 50 % per annum.
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