Key principles of venture funding
While financial planning is inherently “all about the numbers,” there are also many underlying basic principles and key concepts to keep in mind when defining your assumptions and developing the projections that give substance to your plans.
The most important of these principles and concepts are as follows:
- The funding formula: capital = (((sweat equity) + revenue) + financing);
- Money is expensive - plan accordingly so that you dilute your holdings in the business only as little as absolutely necessary;
- Cash is like oxygen - without cash, you can’t survive… While investors will forgive you for losing money, they will not forgive you for running out of cash;
- Investors will review your plan not to see if you got the numbers right but to see if you got the assumptions right.
Typical Investment Stages & Investor Types
When developing a venture financing strategy, consider that from an investment perspective, the life cycle of a new business venture is considered to evolve through five fairly distinct stages.
Depending upon the stage in which you are raising capital, different ‘rules’ apply with respect to a number of key variables including the nature and form of capital that is available to you as well as where, from whom, in what amounts, and at what cost you acquire these inputs.
I (loosely) describe these ‘investment stages’ of a business as follows:
1) The ’seed’ stage:
- This is literally the very beginning of the business;
- Is typically funded by your own sweat equity plus ‘risk money’ from “the three F’s” - Friends, Family & Fools;
- The emphasis is on ‘getting the basic idea down pat’ - for instance, a formal business plan plus a prototype or other meaningful ‘proof of concept’;
- Monies in are typically in the $5,000 to $25,000+ range;
2) The ’start-up’ stage:
- This is where the idea is turned into a tangible, deliverable product or service;
- Is typically funded by your own sweat equity plus money from “angels” and/or in-kind investments of support, etc. from commercial and alliance partners;
- The emphasis is on ‘making something to sell’ - a ‘proof of product’;
- Monies in are typically in the $25,000 to $250,000+ range;
3) The ‘get-to-market’ stage:
- This is where you begin building your customer base;
- Is typically funded by angels and some early-stage ‘venture capitalists’, and in-kind investments of support, etc. from commercial and alliance partners;
- The emphasis is ‘getting to positive cash flow from revenues’ - a ‘proof of marketability’;
- Monies in are typically in the $150,000 to $1,500,000+ range;
4) The ‘get-to-profit’ stage:
- This is where you develop a sustaining business within your initial market(s);
- Is typically funded from revenues, financial investments from groups of angels and venture capitalists as well as in-kind investments of support, etc. from commercial and alliance partners;
- The emphasis is on ‘getting to net positive income’ - a ‘proof of sustainability’;
- Monies in are typically in the $1,500,000 to $5,000,000+ range;
5) The ‘go-for-growth’ stage:
- This is where you leverage your existing business to grow by developing new products and markets;
- Is typically funded from revenues and/or assets as well as by later-stage venture capitalists, private equity investors, and institutional lenders;
- Emphasis is on ‘getting as much mileage out of the business as possible’ - a ‘proof of investability’;
- Monies in are widely varied and depend upon many factors, but are typically at least $2,000,000 to $5,000,000 and can range upward into the tens or even hundreds of millions if/when a buyout by a larger company or an IPO is involved.