The method of seeking investment capital for your company and who you might approach for investment capital could depend upon the stage that you company be a the time. At the concept stage you would be seeking seed capital, which is usually form friends and family. Later stages of the company might mean that you can approach angel investors or venture capital companies, or perhaps even consider raising capital through a public offering of company stock.
Below is a brief discussion of the various stages in which a company might be. Determining which stage your company is at presently would help in determining your possible source of investment capita. Angel Investors might become involved with a company at the Research and Development stage or the First Stage/Start-up. Venture capital firms usually look at companies at a later stage, such as Expansion Stage/Second Stage or Mezzanine. At a later stage of the company, a PIPE (see “PIPE”) might be in order.
Seed Capital - This the very early stage of a company, usually at the idea stage, and sometimes when the company is being organized. The investor becomes one of the “insiders” or original investor. The investor may or may not take an active roll in management, perhaps sitting on the board of directors or other forms of participation. The risk at this stage is higher for the investor, but if the company is successful the return can be much greater.
The seed capital of a company may be put in by the founders or Friends and Family, but more capital is needed.
Research and Development Stage – At this stage of the company, the investor is usually helping to finance the research and development of a product. Where in the initial stage, the company may have been financed by the founder or friends and family, additional capital is now needed to complete the research and development of the product, create a working prototype, or to bring the product to the stage of marketing.
First Stage/Start-up - At this stage, the prototype is usually completed and tested and ready for marketing. The company may have completed market studies, have a management team in place and a business plan developed.
Expansion Stage/Second Stage – The company may have developed the product, have the product into production, started marketing programs and contacts, and in need of addition capital for inventory, advertising and marketing. The company should be generating revenues at this time but may not show profits yet. Hopefully a good management team is in place, including marketing people and the company is well on its way to fulfilling their business plan.
Mezzanine– At this time, the company has increasing sales, may be near the break-even or even profitable and needs funds for further expansion, marketing and working capital. The company is now looking at a more assured future, raising additional funds for growth, perhaps even an IPO. The comp0any may be anticipating other exciting events that would enhance the growth of the company.
Bridge– The Bridge is when the company needs what might be considered short term capital to accomplish a particular goal. It could be a merger or an IPO or to sustain the company while other financing is arranged. A bridge could be in the form of equity or debt. Bridge financing may come from a bank, a venture capital firm, present investor’s or a number of other sources. The bridge financing is usually considered short term, to be paid off in the near future.
Acquisition or Merger– The company may need additional capital to finance an acquisition or a merger of another company, this allowing the company to grow more dramatically.
Turnaround – The company may have need of additional capital to turn the company around from unprofitability to profitability. Perhaps the company has gone through a period of problems and the effect of the infusion of capital may allow the company to change course and bring the company to a profitable position, perhaps through an increased marketing program. The effect of the infusion of capital must be clearly defined in the business plan, as the investor must believe that the added capital will accomplish the job. Investors usually view turnaround money as being a symptom of underlying management, manufacturing or marketing problems.
Each stage of a company may bring in investors with different goals and desires. The different stage of the company will make significant differences in the risk involved, dollars needed, equity position and the timing of “exiting” for the investor. An investment opportunity will present it’s own positive and negatives. The investor will look carefully at each deal presented to them, analyzing the company and the company’s business plan to see if the deal fits their particular criteria. Usually, they can tell from just an executive summary if there is even an interest. If so, they would then review the business plan in depth. If, after reviewing the business plan, the investor, is still interested, the real due diligence starts. It may first include a visit with the principles of the company and doing research into the background of those individuals. The will review the financial statements presented, review the products, including any testing results, market potential, manufacturing costs, the projections of the company, and any other area of the company that would be of interest and relate to the success of the company.
The investor may desire to play an active droll in the company, perhaps in some management position or sit on the board of directors. This may not be all bad if the investor has expertise that can be offered which will help in the success of the company.
Each investor must establish in his own mind the criteria for investing. Investors sometimes lean toward industries that they know and understand, such as technology, oil and gas and retail products, among a few. Some may prefer to invest close to home, which allow him to keep better tabs on the company. He will determine how much he wants to invest, when he expects to “cash out”. He has to determine if wants to co-invest with others and the reward to risk ratio. The investor may want other professional to study the company and advise him. And of course the investor must be contented with the terms of the investment.