Seed Financing

Seed financing is the earliest stage of private equity. A small investment (typically $50,000 to $500,000) is made to support an entrepreneur’s exploration of an idea. There is typically a rough business plan and an incomplete management team. At this point there are no guarantees that the basic technology works or that the product will sell.

Status. This is the inventor stage. There is little more than a concept. There is usually no business plan or timetable. Little if any market research has been conducted.

Tasks. To begin development of a prototype, assemble the beginnings of a team, write a business plan, determine market potential, build the legal structure of the company, and determine IP or proprietary standing.

Financing. Typical venture funds have little interest in this stage. The risk levels are outside their parameters. Personal savings or friend and family money funds this stage. This type of funding is affectionately referred to as the “Friends, Family, and Fools” stage as these are the only ones who would contemplate such an investment. If successful, this stage usually ends with the completion of a seed-stage business plan and the formation of the company.

Startup Financing

Startup financing usually involves a larger investment ($250,000 to $1,000,000) in a company that is ready to begin operations. A competitive advantage should be evident here. If high-tech, there should be a product in prototype form with some proprietary technology. A service company might boast an impressive management team with significant industry experience.

Status. At least one principal person of the company is pursuing the project on a full-time basis. The business model is being tweaked and reviewed. The team is beginning to take shape, market analysis has begun, and beta customers are being identified or first customers are buying. Funding has taken on a more serious role with the founders spending a great deal of time presenting to the local \”angels\” or high net worth individuals.

Tasks. Complete and test the prototype and obtain proof of interest in your target market. Identify and recruit the core management team, polish the business plan, establish manufacturing and begin sales. Tenacity and perseverance are the only ways to get through this stage. Companies are often \”bootstrapped\” during this phase with rent and payroll presenting monthly challenges. Venture firms often judge the CEO’s \”intestinal fortitude\” during these trying times with funding dependent upon certain milestones.

Financing. Some venture funds may show an interest at this stage, assuming that one or more of the following has occurred: A world-class, experienced team has been assembled, significant patent protection has been attached to a cutting-edge technology, or considerable interest has been generated from customers in a large market. Financing eats up more and more time as capital needs grow with each hire; talent ain’t cheap. Complete funding could take several months to a year or more over several installments.

Early-Stage Financing

This is Highway 12′s focus. Early-stage (first stage) companies are ongoing businesses. They are generally not profitable, but have a working product and, preferably, some revenues. Early-stage financing is typically used to establish a company’s first major marketing efforts, and to hire sales and support personnel in anticipation of higher sales volume. Often, these funds are used to scale a business that is already experiencing success.

Status. The company is now a going concern. If it’s a service company, some customers have tried the service. If high-tech, product development cycles have begun. Most, if not all, of the key management positions have been filled. By now, the company has experienced some setbacks, customers can confirm product usage, marketing is being refined, adjustments are being made in the business plan, and the money-raising efforts continue.

Tasks. To achieve market penetration and initial sales goals, reach close to break-even, improve productivity, increase margins, build the sales organization and distribution system.

Financing. At this stage, most venture funds are interested, and the degree to which the company has succeeded will determine which funds will participate. Financing is needed to get the production bugs worked out and to support initial sales and marketing efforts.

Expansion-Stage Financing (2nd, 3rd, 4th rounds…)

Status. Significant sales are developing, as are assets and liabilities. The company is sometimes achieving break-even, and cash flow management becomes a priority. Mid-level management is being courted and hired.

Tasks. To maintain consistent profitability, expand sales in volume and transform sales emphasis from regional to national, identify international possibilities, and receive working capital to expand all facets of the business.

Financing. As later-stage financing is often very capital intensive (>$5M), outside money must most likely be brought to the table. As we know many businesses will require more than one stage of financing, Highway 12 reserves capital for these stages at a 2:1 ratio. But Highway 12 alone will not be able to fill these needs. Part of the value Highway 12 adds to our portfolio companies is our ability to help bring later-stage financing to the table through our regional network of other VC funds and access to Village Ventures’ network as well.

Mezzanine Stage

Status. The potential for a major success is beginning to be apparent. Hiccups are being worked out in all areas from design and development of second-generation products; to marketing and distribution; to management and all its applied systems.

Tasks. To increase market reliability, begin export marketing, put second-level management in place, begin to “dress up” the company for an IPO or acquisition.

Financing. At this stage, the company may need to obtain “bridge” or “mezzanine” financing to carry increased accounts receivable and inventory prior to an exit. There is a great amount of pressure to prove second- and third-generation products, increase profitability records, improve the balance sheet, and firmly establish market share and penetration.

The Exit

Exit events typically are of two types: an IPO (Initial Public Offering) or M & A (merger with another company or acquisition by a larger company). A successful exit is the way in which we return money to our investors.