Types of Venture Capital

The definitions of the types of venture capital are divided into "Early-Stage", "Expansion", and "Acquisition/Buyout" financing.

EARLY-STAGE FINANCING

"Seed Financing" is a relatively small amount of capital provided to an inventor or entrepreneur to prove a concept and to qualify for "start-up" capital. This may involve product or service development, market research, building a management team and developing a business plan.

"Start-up Financing" is provided to companies completing product or service development and initial marketing. These companies are generally in business for less than 1 year, and have not yet sold their product or service commercially. Usually such firms have market studies, assembled key management, developed a credible business plan and are ready to do business.

"First Stage Financing" is provided to companies that have expended their initial capital and require funds to initiate full-scale manufacturing or servicing.

EXPANSION FINANCING

"Second-Stage Financing" is working capital for the initial expansion of a company that is providing services, or is producing and shipping product, and has growing accounts receivable and inventories. At this juncture, the company may not be showing a profit.

"Third-Stage Financing" or "Mezzanine Financing" is provided for major expansion of a company whose sales volume is increasing and that is breaking even or profitable. These funds are used for further expansion of additional services (some of which can be real estate oriented), marketing, working capital or additional product development.

"Bridge Financing" has multiple definitions.

  • It refers to shorter term, interest only financing.

  • It also helps IPO driven companies to obtain short-term financing that will be repaid when the IPO occurs.

  • To an assisted living, skilled nursing or acute care company, where real estate is an important component of the balance sheet, it can mean financing for properties that are in development and and require some degree of stabilized occupancy before permanent, long-term financing can be obtained.

  • It is also used when a restructuring is undertaken if there are early investors who want to reduce or liquidate their positions, or when management has changed the stockholdings of the former management and are buying out former positions to relieve a potential oversupply of stock when becoming public.


ACQUISITION / BUYOUT FINANCING

"Acquisition Financing" provides funds to finance an acquisition of all, or a portion of, another company.

"Management/Leveraged Buyout Financing" enable an operating management group to acquire a product line or business (which may be at any stage of development) from either a private or public company. The acquisition may be for the purchase of select assets or stock.